At the November 2024 meeting of the Monetary Policy Committee (MPC), the Monetary Policy Rate (MPR) was raised further by 25 basis points to 27.50%, the highest in its history. This marked a continuation of the tightening cycle, which began in 2022, aimed at combating rampant inflation, which stood at 33.88% in October 2024. The decision was unanimous among committee members, reflecting a consensus on the need to address escalating price pressures stemming from both core and food inflation. Governor Olayemi Cardoso emphasised that maintaining a high MPR is crucial for stabilising prices and protecting citizens’ purchasing power while also ensuring exchange rate stability. The MPC has hiked the MPR by a cumulative 1600 bps since May 2022, while inflation has risen by 16.17% within the same period.

In sharp contrast to the CBN’s policies that remain firmly tethered to combating inflation, in 2024, central banks in advanced economies began lowering interest rates, marking a shift from the aggressive tightening cycles of 2022 and 2023. This transition is driven by declining inflation rates, which have fallen closer to target levels, and concerns over slowing economic growth. For instance, the U.S. Federal Reserve reduced its benchmark interest rate by 50 bps in September 2024 after inflation cooled to 2.1% and GDP growth slowed to 1.6%. In November 2024, the Fed cut rates further by 25 bps to 4.75%. Similarly, the European Central Bank and the Bank of England have signalled a more accommodative stance to stimulate their economies as inflationary pressures subside. This policy divergence highlights the significant structural impediments that both constrain economic output and underpin inflation.

CBN’s Tightening Cycle: Is the End in Sight?

Governor Olayemi Cardoso has suggested a potential monetary policy stabilisation to align with broader economic reforms. This statement has prompted many analysts to interpret the MPC’s recent marginal interest rate hike as indicative of a possible shift towards a less hawkish stance and a potential end to the aggressive tightening cycle initiated in 2022. For the CBN, the pressing question is whether this strategic shift is feasible, given the current balance of risks, or if further interest rate hikes are imminent.

Factors Supporting Continued Tightening

Structural factors, such as elevated energy and food prices, continue to exert upward pressure on inflation. The attempted removal of petrol subsidies has led to a significant increase in pump prices, rising by approximately 24% to ₦1060 per litre since September 2024. In addition, the national average Cost of a Healthy Diet (COHD) has surged by 91% from ₦703 in October 2023 to ₦1,346 in September 2024. These persistent inflationary pressures may necessitate further interest rate hikes to anchor inflation expectations. Moreover, exchange rate volatility, given Nigeria’s significant import dependency, remains a critical concern for the CBN.

In 2024, the naira has depreciated significantly, losing 47.2% of its value year-to-date (as of November) to ₦1682/$. This depreciation, coupled with the 62.75% year-on-year surge in money supply (M3) to ₦108.95 trillion, have been major drivers of inflation. To attract foreign portfolio investment (FPI) inflows and stabilise the currency, particularly in the face of negative real returns, sustained high interest rates may be necessary.

Factors Against Continued Tightening

The Economic Growth Concern

There is the broad consensus that prolonged tightening risks tipping the economy into stagnation, particularly considering that the primary drivers of inflation are cost-push rather than demand-pull factors.

Nigeria’s GDP grew by 3.46% year-on-year in Q3 2024, an improvement from the 3.2% in Q2 2024 and 2.54% Q3 2023. This expansion in economic output was primarily driven by the services sector (accounting for 53.58% of GDP), which expanded by 5.19% and accounted for 53.58% of GDP. The agriculture sector recorded a deceleration in growth – 1.14% (Q3 2023: 2.1%), which is indicative of uneven performance across the economy. The dominant segment, crop production, comprising 26.51% of GDP, remained subdued, with growth slowing to 1.18% in Q3 2024 (Q3 2023: 1.35%). While increased food output from the harvest season contributed to this growth, the segment remains significantly constrained by persistent insecurity, including farmer-herder clashes and kidnappings for ransom in key agricultural regions. Crucially, the oil sector expanded 5.17%, with output rising to 1.47 million barrels per day (mbpd), from 1.41 mbpd in Q2 2024 and 1.45 mbpd in Q3 2023.

Financial Sector Soars, Real Economy Struggles

Nonetheless, the prolonged high-interest-rate environment in Nigeria has triggered concerns over its impact on the real sector, with lending rates ranging from 35% to 40% for businesses. While financial institutions, which achieved real GDP growth of 31.92% in Q3 2024 (Q3 2023: 29.66%) continue to benefit from higher net interest margins, the productive sectors – manufacturing, agriculture, and trade – are increasingly constrained by high borrowing costs. High borrowing costs can deter capital investment needed for business expansion and innovation as well as suppress consumer spending as households allocate more income towards servicing debts rather than consuming goods and services.

Sectors such as trade and manufacturing (critical employment sectors) have lagged in their recovery despite their significant contributions to GDP due to their sensitivity to both interest rates and the exchange rate. Consequently, while the financial sector thrives, the real economy struggles, with a widening gap between economic growth and quality-of-life improvements for ordinary Nigerians. These gains, although positive, may be fragile without deeper structural reforms to address productivity bottlenecks, infrastructure deficits, and overreliance on oil revenue.

Some analysts argue that the Q3 2024 GDP performance indicates that recent economic reforms are beginning to yield positive results. The liberalisation of the exchange rate regime has fostered increased market confidence and contributed to a strengthening of the country’s gross external reserves position (up 22% to $40.2billion as at end-November 2024). In addition, the removal of petrol subsidies has created fiscal space for increased public investment. Nonetheless, while the positive impact of the aforementioned remains debatable, we contend that only a steady increase in crude oil production by at least 300,000 barrels per day (bpd) could serve as a significant game changer in the short term. This would provide the federal government with critical fiscal and foreign exchange relief, bolster support for the naira, and alleviate inflationary pressures that have persistently strained the economy.

Outlook for 2025

As advanced economies pivot toward monetary easing, Nigeria grapples with its unique challenges, including persistent inflation and structural economic constraints. We believe the CBN may consider pausing its tightening cycle if inflation shows sustained signs of decline and exchange rate stability improves. With the diminishing risk of capital flight from Nigeria due to narrowing interest rate differentials as emerging markets become increasingly attractive to investors, a shift towards a more growth-supportive monetary policy stance is becoming more plausible. However, a shift toward easing is unlikely without substantial progress in addressing structural inflation drivers, such as energy and food supply constraints. Nonetheless, high interest rates, while aimed at price stability, are crowding out the real sector, underscoring the need for balanced monetary and fiscal policies.

The Nigerian National Petroleum Company (NNPC) has set an ambitious target of 2 mbpd by the end of 2024. However, given recent production figures of 1.39 mbpd in September 2024 and 1.43 mbpd in October 2024, achieving this target within a short timeframe without significant investment seems unlikely. Furthermore, with the potential for increased oil production from fracking operations in the short to medium term, global oil prices may face downward pressure, further clouding Nigeria’s oil revenue outlook. While we remain cautious about potentially overly optimistic production numbers and forecasts from the NNPC, we believe that a significant boost in oil production in the short term could serve as a catalyst for the CBN to realign its monetary policies with the imperatives of economic growth. If these measures prove insufficient, the government may consider the sale of state-owned assets, potentially including its stake in Joint Venture (JV) oil assets. Such a move could bolster foreign exchange reserves and support the exchange rate, thereby alleviating cost-push inflationary pressures.