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ANALYSIS: Why the CBN Refused Another Rate Cut

By Kabir ABDULSALAM

When members of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) concluded their 306th meeting on July 21, many analysts expected a cautious decision. Despite easing inflation, stronger external reserves and a relatively stable foreign exchange market, the committee again retained the Monetary Policy Rate (MPR) at 26.5 per cent— for the second consecutive meeting after its rate cut in February.

For many Nigerians, the decision simply meant interest rates remained unchanged. But this is more about the CBN’s attempt to preserve macroeconomic stability while navigating one of the most uncertain global economic environments in recent years.

The decision reflects the difficult balancing act facing CBN Governor Olayemi Cardoso and the MPC such as controlling inflation without choking economic growth, protecting the naira without discouraging investment, and maintaining financial stability while millions of Nigerians continue to grapple with high living costs.

Why the CBN Stayed Cautious

The committee’s decision was shaped largely by external risks rather than domestic weakness.

Although Nigeria’s headline inflation eased marginally to 15.91 per cent in June from 15.93 per cent in May, the CBN warned that renewed hostilities in the Middle East posed fresh risks to global energy prices and imported inflation.

The MPC acknowledged that inflation was moderating and that previous monetary tightening had begun to yield results. However, members concluded that cutting rates too early could reverse those gains.

Cardoso explained that the committee was encouraged by the gradual moderation in inflation but remained wary of developments beyond Nigeria’s borders.

“These were shocks that we were not anticipating in that manner,” he said, referring to the prolonged Middle East conflict. “It is not something we can wish away. It is something we need to deal with.”

The governor also stressed that stronger collaboration between fiscal and monetary authorities would remain critical to achieving the CBN’s long-term objective of returning inflation to single digit.

Unlike previous MPC meetings dominated by worsening economic indicators, July’s meeting painted a more encouraging picture.

Inflation has slowed for several months, core inflation has eased significantly, external reserves have climbed to $52.52 billion—enough to cover approximately 11 months of imports—and the Purchasing Managers’ Index (PMI) has returned above the 50-point threshold, signalling renewed business expansion.

The committee also highlighted the resilience of the banking sector following the recapitalisation exercise, noting that key prudential indicators remained strong.

These developments suggest that some of the difficult reforms undertaken by both the Federal Government and the CBN are beginning to produce measurable macroeconomic gains.

Yet, the MPC believes the economy remains too vulnerable for premature monetary easing.

Why Cutting Rates Could Have Been Risky

Economist and Lead Partner at SPM Professionals, Dr. Paul Alaje, supported the MPC’s decision, arguing that reducing interest rates at this stage could trigger a chain reaction capable of undermining the gains already achieved.

“If we reduce our interest rate, it will affect our reserves. If it affects our reserves, it will affect the exchange rate. If it affects the exchange rate, it will affect prices, and if it affects prices, it will affect inflation,” he explained.

His argument mirrors the CBN’s own concerns.

Lower interest rates generally reduce returns for foreign portfolio investors, increasing the likelihood of capital outflows. Reduced foreign exchange inflows could weaken external reserves, put pressure on the naira and eventually fuel imported inflation.

In other words, the MPC appears to have chosen stability over short-term stimulus.

Financial analyst Bismarck Rewane reached a similar conclusion, noting that inflation expectations remain elevated despite recent moderation. According to him, the volatility of global crude oil prices, uncertainty surrounding geopolitical tensions and domestic inflation risks justified the committee’s cautious approach.

But High Rates Come at a Cost

While defending the MPC’s decision, Alaje was equally clear that prolonged high interest rates carry significant consequences for the productive sector.

“The real sector is already stifled,” he observed. “That is why reforms should not be limited to one sector. They should cover the entire economy.”

Manufacturers continue to grapple with expensive credit, while many small and medium-scale enterprises struggle to access affordable financing. Higher borrowing costs inevitably translate into lower investment, slower business expansion and fewer employment opportunities.

Consumers also feel the impact through higher lending rates on mortgages, vehicle financing and business loans.

This illustrates the central dilemma confronting monetary policymakers: lowering rates too early risks reigniting inflation, while keeping rates elevated for too long suppresses investment and growth.

Monetary Policy Alone Cannot Fix Nigeria

Perhaps Alaje’s strongest argument was that monetary policy has limits.

“The real thing that is missing in all of this is productivity,” he said. “In spite of all the reforms, in spite of the money and the foreign reserves, if there is no productivity, the economy cannot achieve sustainable growth.”

His observation reinforces a point repeatedly emphasised by many economists that inflation in Nigeria is driven not only by money supply but also by structural factors such as insecurity, poor transportation infrastructure, energy costs, logistics challenges and weak agricultural productivity.

Even with the highest interest rate in years, food inflation remains elevated because insecurity continues to disrupt farming activities while transportation costs remain high.

“I do not disagree with what the Monetary Policy Committee did,” Alaje added. “It was better to retain rates. But we also need to combat insecurity, prioritise transport and energy, and place greater emphasis on productivity.”

His remarks underscore the need for stronger coordination between fiscal, monetary and trade authorities if Nigeria is to achieve sustainable economic recovery.

The Reform Message Beyond Interest Rates

One of the less-publicised outcomes of the July MPC meeting was its strong endorsement of broader economic reforms.

The committee commended the Federal Government’s efforts to improve crude oil production while urging faster implementation of reforms in the solid minerals sector.

It specifically highlighted the importance of Executive Order 9 and called on relevant agencies to maximise the country’s mineral resources as an additional source of government revenue.

The message was clear: monetary policy alone cannot drive long-term economic stability.

Nigeria must diversify its revenue base, improve productivity and reduce dependence on crude oil earnings if it hopes to withstand external shocks.

The committee also praised closer collaboration between fiscal and monetary authorities, noting that improved policy coordination had helped moderate the domestic impact of recent global developments.

Banking Sector Recapitalisation

Another notable highlight of the meeting was the CBN’s positive assessment of the banking sector recapitalisation exercise.

Cardoso disclosed that 33 of Nigeria’s 37 banks had successfully met the new capital requirements without the need for deadline extensions.

Much of the new capital, he noted, came from domestic sources, demonstrating growing investor confidence in Nigeria’s financial system.

The governor assured depositors that the remaining banks remained under the close supervision of the CBN and that there was no cause for concern.

Maintaining a stable banking system remains one of the central bank’s key mandates and provides an important foundation for broader economic stability.

What Nigerians Should Expect

For ordinary Nigerians, the immediate impact of the July MPC decision is unlikely to be dramatic.

Borrowing costs will remain high for households and businesses, while banks are expected to maintain relatively tight lending conditions.

However, if inflation continues to moderate, the naira remains stable and food supply improves during the harvest season, the CBN could have greater room to consider a more accommodative monetary stance in future meetings.

Much will also depend on factors beyond the CBN’s control—including global oil prices, developments in the Middle East, domestic security, food production and the pace of fiscal reforms.

The Bottom Line

The July MPC meeting demonstrated that the CBN is prioritising stability over speed.

Holding interest rates at 26.5 per cent was not merely a decision about inflation; it was an attempt to safeguard the naira, preserve investor confidence, protect foreign reserves and maintain financial system stability in an increasingly uncertain global environment.

But the meeting also reinforced an equally important reality: monetary policy cannot carry Nigeria’s economic recovery alone.

Without stronger fiscal reforms, improved security, higher productivity, better infrastructure, affordable energy and accelerated diversification into sectors such as agriculture and solid minerals, high interest rates alone cannot deliver sustainable growth or meaningful relief for ordinary Nigerians.

Obviously, the CBN is determined to consolidate the gains already achieved. Whether those gains ultimately translate into lower prices, stronger businesses and improved living standards will depend on how effectively monetary policy is complemented by bold structural reforms across the wider economy.