A Shift in Monetary Policy: Nigeria’s Central Bank Eases Interest Rates
After two years of aggressive monetary tightening, the Central Bank of Nigeria (CBN) has finally taken a step back. With five consecutive months of disinflation and the naira maintaining stability below N1,500 per dollar, the apex bank has reduced its benchmark rate for the first time since 2020. This decision marks a significant shift in policy and raises questions about its implications for businesses, households, and the wider economy.
Inflation Declines: A Positive Trend
Inflation has long been Nigeria’s most persistent economic challenge. For years, prices of essential goods such as food, fuel, and basic services have risen unchecked, eroding wages and leaving households worse off. However, 2025 has seen a notable decline in inflation. According to official data, the country’s inflation rate dropped from 24.48% in January to 20.12% in August. The National Bureau of Statistics reported that this decline was steady, with the rate falling sharply in February to 23.18%, and maintaining a downward trend through the first half of the year. By June, inflation had eased to 22.22%, and by July, it reached 21.88%. The August reading marked the fifth consecutive monthly decline and the lowest rate so far this year.
On a month-on-month basis, inflation slowed to 0.74% in August, down from 1.99% in July. Core inflation, which excludes volatile food and energy items, fell to 20.33%, while food inflation dropped to 21.87%, aided by lower prices of rice, maize, and millet.
Rate Cut: A Cautious Move
For Central Bank Governor Olayemi Cardoso and his Monetary Policy Committee (MPC), these figures were enough to justify a first interest rate cut under Cardoso and the first by the apex bank since September 2020. At its September 2025 meeting, the MPC lowered the Monetary Policy Rate (MPR) by 50 basis points to 27%. Cardoso described the move as cautious but necessary, citing the lagged effect of earlier monetary tightening, fuel price moderation, and improved harvests as reasons to expect inflation to continue decelerating.
The Bank is trying to strike a balance between easing borrowing costs for businesses and households and avoiding another surge in inflation. However, there are risks. At over 20%, inflation remains high, and Nigerians still spend most of their income on essentials like food, transport, and housing. Experts warn that without structural reforms to tackle insecurity in food-producing areas, poor transport networks, and high energy costs, disinflation may stall.
Stable Naira and Stronger Reserves
Behind the decision to ease rates lies another crucial development: the relative stability of the naira. After years of freefall, multiple exchange rates, and mounting investor skepticism, the Nigerian currency has found firmer footing. The naira recently broke below the N1,500-per-US dollar mark in the official foreign exchange market. This is largely due to a reformed FX regime, improved capital inflows, and rising oil receipts.
Abdul-Samad Rabiu, chairman of BUA Group, predicted that the naira will strengthen to between N1,300 and N1,400 to the dollar by the end of the year. He praised the CBN’s reforms, which have eliminated the need for companies to lobby for foreign exchange. Previously, the official rate was significantly lower than the parallel market rate, creating distortions and limiting access for many businesses.
External reserves, which had plummeted to alarming levels in 2023, climbed to $43.05 billion by September 11, 2025, up from $40.51 billion at the end of July. The apex bank now boasts an import cover of 8.28 months, giving it more leverage to manage shocks.
Market analysts at Cowry Assets Management described the September rally as a significant milestone that could provide stability for the naira in both official and parallel markets. They projected that reserves could rise to about $45 billion by the end of 2025, driven by steady offshore inflows, improved oil earnings, and planned external borrowings.
Economic Growth Returns, But Fragility Persists
In the second quarter of 2025, Nigeria’s economy expanded by 4.23% year-on-year, up from 3.13% in Q1. Crucially, the oil sector rebounded by 20.46%, compared to just 1.87% in the previous quarter. This turnaround was credited mainly to improved security in the Niger Delta and the steady ramp-up of operations at the Dangote Refinery.
However, growth outside oil remains uneven. Agriculture grew by only 2.82%, and services remain sluggish. Manufacturers continue to struggle with poor infrastructure, insecurity, and high energy costs. Without deeper reforms, particularly in logistics, power, and security, growth will remain narrow and vulnerable.
Regional Trends and Domestic Reactions
Nigeria’s rate cut is not an isolated event. Across Africa, central banks are beginning to ease monetary policy in response to slowing inflation. Most recently, Ghana slashed its policy rate by 350 basis points to 21.5%, while Kenya trimmed its benchmark rate to 9.5% in mid-August.
Despite the positive developments, some stakeholders argue that the reduction remains marginal and insufficient to ease the credit squeeze on manufacturers and small businesses. Industry leaders have called for more substantial cuts to support production and investment.
The Centre for the Promotion of Private Enterprise echoed similar sentiments, commending the MPC’s move but stressing the need for complementary fiscal reforms. It urged the government to address insecurity and invest in infrastructure to reduce production costs and boost investor confidence.
