by Aliyu Galadima
Financial analysts at BMI, a Fitch Solutions Company, have forecasted that the Central Bank of Nigeria ,CBN, will reduce its benchmark policy rate by a cumulative 450 basis points to 23.00% by the end of 2025.
This projection follows an anticipated 25bps increase to a terminal rate of 27.50% in November 2024.
The analysts stated this in a report titled ‘Moderating Inflation To Prompt Interest Rate Cuts In Nigeria In 2025′, which highlights expected changes in Nigeria’s monetary policy.
According to the report, the CBN’s easing cycle is expected to commence at its second Monetary Policy Committee ,MPC, meeting in 2025, as inflationary pressures subside due to greater stability in the foreign exchange market and the near-completion of fuel subsidy removal.
These factors are expected to mitigate the need for significant price hikes in 2025.
BMI anticipates that the CBN will leave the benchmark interest rate unchanged at its first MPC meeting of 2025, likely to take place in January or February.
Inflation accelerated in September and October 2024 due to efforts to phase out Nigeria’s costly fuel subsidy.
Year-on-year inflation is projected to remain above 30 per cent leading up to this initial meeting, with month-on-month inflation in October 2024 recorded at 2.6%, well above the long-term monthly average of 1%. This indicates persistent underlying price pressures.
However, BMI does not expect the CBN to raise its policy rate beyond the current 27.50%.
Despite Nigeria’s relatively weak monetary policy transmission mechanism—where credit accounts for only 17.7% of GDP—yields on government bonds and treasury bills have increased significantly in 2024.
Additionally, Nigeria’s reliance on domestic borrowing to finance large budget deficits is a critical factor.
Domestic debt accounts for 53% of the country’s total debt stock, underscoring the federal government’s need to balance debt servicing costs and fiscal sustainability.
BMI argues that further monetary tightening would exacerbate the federal government’s already high debt servicing burden, which policymakers will likely seek to avoid.
BMI expects the CBN to begin its monetary easing cycle at the second MPC meeting of 2025, with inflationary pressures gradually dissipating.
By year-end 2025, inflation is projected to decline to 22.1%, facilitating a return to positive real interest rates—a key policy objective emphasized by CBN Governor Olayemi Cardoso in September 2024.
This inflation forecast assumes increased foreign exchange market stability and the near-completion of subsidy removal measures.
Governor Cardoso and MPC members have reiterated their commitment to price stability, describing it as the cornerstone of a thriving Nigerian economy.
The November 2024 rate hike, which marked the end of a 1,600bps tightening cycle over two and a half years, reflects this commitment.
Looking ahead, BMI’s projection of a 450bps rate cut in 2025 underscores the CBN’s strategy to adopt a more accommodative monetary stance as inflation moderates and real interest rates turn positive.
The anticipated shift in Nigeria’s monetary policy highlights a delicate balancing act between managing inflation and fostering economic stability.
Analysts will closely monitor the CBN’s actions in 2025 as the nation navigates complex fiscal and monetary challenges, including subsidy reforms and efforts to bolster non-oil revenue.
