The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is scheduled to hold its next meeting on July 21st and 22nd.
Since its last convening, global economic pressures have moderated, while domestic inflation has continued on a downward trajectory. Concurrently, the naira has shown signs of relative stability, supported by improved foreign exchange liquidity and reduced demand-side pressures.
In light of these developments, we believe the MPC may be inclined to reassess its current policy stance. With key macroeconomic indicators pointing to a more stable outlook, the Committee could initiate a gradual shift towards monetary policy easing.
That said, we expect any adjustment to be measured. Specifically, we anticipate a 50bps reduction in the Monetary Policy Rate (MPR), reflecting a cautious approach in a bid to balance the need to support economic growth with its mandate to ensure price and exchange rate stability.
Global Pressures Have Eased, Though Uncertainty Remains
Trade tensions have softened from the tariff hike announcements in April. The US President paused the implementation of reciprocal tariffs, allowing countries to negotiate lower tariffs for 90 days (April 9 – July 8), which was recently extended to August 1. Three countries, including the UK, China, and Vietnam, have so far reached a deal with the US to lower tariffs, while a few other countries remain in active discussions with the US on new trade arrangements.
Despite renewed tariff threats from the US, market volatility has been relatively subdued compared to the heightened swings observed in Q2-25. Additionally, geopolitical tensions have eased after the US brokered a ceasefire deal between Israel and Iran. However, uncertainty lingers over the broader economic implications of existing tariffs and ongoing trade negotiations, posing risks to global stability.
On monetary policy, central banks have maintained a cautious approach, as they continue to assess the impact of the increased trade tariffs and geopolitical uncertainty on their respective economies. In June, the US Federal Reserve again kept its policy rate unchanged at the 4.25% – 4.50% range for the fifth time in a row, citing that economic activity has stayed strong while inflation risks remain tilted to the upside, primarily due to higher tariffs.
The Bank of England (BoE) also held its benchmark interest rate steady at 4.25% in its June 19 monetary policy meeting, highlighting persistent inflation risks that may be fueled by higher energy prices resulting from the escalation of the Middle East conflict. On the other hand, the European Central Bank (ECB) opted to cut its three key interest rates for the fourth time this year, including the deposit facility, the main refinancing operations and the marginal lending facility, by 25bps apiece to 2.00%, 2.15% and 2.40%, respectively, given their expectation of weaker economic prospects induced by higher trade tariffs.
With persistent inflation risks, particularly in the US and the UK, we expect the monetary policy authorities to maintain a wait-and-see approach, likely holding rates steady until clear signs emerge that consumer prices are moderating towards their target of 2.0%.
Domestic Economy Has Maintained Robust Growth Trajectory
We assess that economic activity remained on a firm upward trajectory in Q2-25, supported by easing inflationary pressures and naira stability, both of which have strengthened business confidence and production. The CBN composite PMI averaged 52.2 points in Q2-25 (Q1-25: 51.3 points | Q2-24: 48.0 points), indicating broad-based expansion across the agriculture, industry, and services sectors.
Although crude oil production was somewhat volatile (Q2-25: 1.68 mb/d vs. Q1-25: 1.67 mb/d), average output remained above 2024 levels (Q2-24: 1.47 mb/d), reflecting ongoing recovery in the oil sector, supported by improved investment flows and fewer operational disruptions.
Overall, we estimate that real GDP grew by 4.10% y/y in Q2-25 (Q1-25E: 3.61% y/y | Q2-24: 3.20% y/y), and we expect the solid growth momentum to persist through H2-25. For 2025E, we project average real GDP growth of 3.90% y/y, up from 3.40% y/y in 2024.
Headline Inflation Moderated Again in June
Inflation has remained on a downward trend, as the stability of the naira has kept import prices low and anchored inflation expectations. The NBS reported a further easing of the inflation rate to 22.22% y/y in June (May: 22.97% y/y), reflecting a decrease in the prices of farm produce and a decline in energy inflation. We expect inflation to remain on a downward trend, especially as the naira is projected to remain stable. Additionally, we expect petroleum product prices to remain stable, supported by low global oil prices, which should help maintain steady transportation costs.
Capital Inflows are Recovering after the Global Shock in April
Capital inflows have rebounded since global financial pressures eased in May. The elevated naira yields and a stable FX market have continued to attract foreign portfolio investments and bolster investor confidence. Specifically, inflows from foreign investors surged by 315.0% to USD2.73 billion in June, the highest since March 2019, from USD657.4 million in April, with FPI inflows accounting for 97.2% of total foreign inflows.
The rebound in inflows led to a decline in CBN interventions as demand pressures waned. Specifically, inflows from local sources fell sharply by 30.0% to USD2.11 billion (April: USD3.02 billion), with the CBN segment declining by 637.7% to USD183.00 million, from USD1.35 billion in April. The naira responded positively, appreciating by 3.97% m/m to an average of NGN1,550.82/USD in June (May: NGN1,595.91/USD), and has remained stable so far in July, trading between NGN1,528.00/USD and NGN1,535.00/USD.
On the other hand, the FX reserves have declined by 8.4% YTD, closing July 11 at USD37.43 billion, reflecting relatively stronger CBN market intervention this year and external debt servicing amid still weak oil receipts. Looking ahead, we expect robust FX liquidity from both foreign and local sources, driven by strong market confidence, to continue supporting naira stability in the near term.
All Indicators Point to a Pivot to Monetary Policy Easing
Amid sustained improvements in key indicators, particularly inflation and the exchange rate, we anticipate that the MPC will begin reassessing its current policy stance. Inflation is expected to moderate further in H2-25, reinforcing the case for a pivot toward monetary easing. This view is bolstered by recent declines in short-term debt market rates: the discount rate on the 364-day T-bill dropped by 254bps to 16.30%, while the 363-day OMO stop rate fell by 265bps to 21.99% at the July 9 auctions. We interpret these shifts as early signals of a gradual move toward policy accommodation aimed at lowering borrowing costs for both the government and corporates.
That said, we expect the MPC to tread cautiously, balancing growth support with its mandate to preserve price and exchange rate stability. While some policy easing is likely, the Committee is expected to ensure that interest rate levels remain sufficiently attractive to sustain capital inflows and anchor inflation expectations amid tight global liquidity and persistent uncertainty. As such, we expect the MPC to reduce the MPR by 50bps to 27.00% at its meeting next week.
In a bid to steadily ease monetary conditions, the MPC may also lower the Cash Reserve Ratio (CRR) for Deposit Money Banks and Merchant Banks by 500bps to 45.0% and 200bps to 14.0%, respectively, while retaining other parameters, including the asymmetric corridor at around the MPR at +500/-100bps and Liquidity Ratio at 30.00%.
Cordros
