As Rising FX Inflows, Dip in Money Supply Sustain Price Stability

Donatus Eleko

Price and exchange rate stability are primary roles played by central banks across the world. The drop in Nigeria’s inflation rate in May has been attributed to changes in macroeconomic dynamics as well as monetary-fiscal policies alliance. Analysts view the moderation in May’s headline inflation at 22.97 per cent as a positive outcome of improved FX stability, easing energy prices, and a slowdown in money supply growth.

The drop in May inflation figures did not just happen. It was a fallout of key policy reforms by the Central Bank of Nigeria (CBN).

It was the outcome of stability in the FX market, appreciation of the naira and significant drop in money supply.

Expectedly, Nigeria’s annual inflation rate eased to 22.97 per cent in May from 23.71 per cent in April 2025, the National Bureau of Statistics (NBS) said.

Besides, broad money (M2) growth tempered to an average of 1.3 per cent month-on-month and 20.3 per cent year-on-year in 2025, against 5.6 per cent month-on-month and 75.5 per cent year-on-year in 2024.

Nigeria Records Strong FX Inflow in fourth quarter of 2024, Net Inflows up 99 per cent year-on-year to $61.2 billion. The CBN’s latest quarterly economic report for fourth quarter 2024 shows that the overall FX inflow into the Nigerian economy increased by plus 21 per cent quarter-on-quarter to $27.8 billion. Similarly, the value of FX outflow grew by plus 31 per cent quarter-on-quarter to $10.4 billion.

Aside the CBN, other central banks the worlds over are obsessed about inflation and, therefore, devote a significant amount of resources at their disposal to fight inflation.

The CBN’s planned inflation targeting framework and raising Monetary Policy Rate by 875 basis points to 27.5 per cent in 2024—an essential move to contain inflation and restore stability.

The financial sector regulator has also been controlling the growth of money supply to achieve price stability.

Specifically, the naira appreciated by 0.7 per cent month-on-month, closing at N1,586.15/$1.00.

Additionally, prices in the energy sector declined by 0.4 per cent month-on-month in May. The monthly energy deflation was likely supported by reductions in Premium Motor Spirit (PMS) prices by Dangote Petroleum Refinery (and select independent marketers) which brought ex-depot prices down to a range of N875.00 to N905.00/litre across states and regions.

In emailed report to investors, Managing Director, Afrinvest Nigeria Limited, Ike Chioke, stated that while the positive strides in consumer price dynamics (especially core inflation) could set the stage for a potential rate cut by the MPC in second half of this year, persistent risks in the food sector – stemming from agrarian and structural factors – are potent headwinds ahead.

According to the report, sustained currency appreciation and the lagged impact of PMS price cuts in late May are likely to counteract the impact of holiday-induced price hikes in some core items and keep the sub-component inflation modest.

Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in the prices.

Simply put, inflation depicts an economic situation where there is a general rise in the prices of goods and services, continuously. It could be defined as ‘a continuing rise in prices as measured by an index such as the consumer price index (CPI) or by the implicit price deflator for Gross National Product (GNP).

Inflation is frequently described as a state where “too much money is chasing too few goods”. When there is inflation, the currency loses purchasing power. The purchasing power of a given amount of naira will be smaller over time when there is inflation in the economy.

An economist, and CEO, Financial Derivatives Company Limited, Bismarck Rewane said a stronger oil sector could mean more stable fuel prices and a boost in government revenue.

The Economic Intelligence Unit (EIU) projects a 4% rebound in retail sales in 2025, with consumer spending expected to recover modestly to $127 billion. There was also significant input by the monetary authorities in bringing inflation down.

Director of Trading at Verto, Charlie Bird, said a number of factors, including rising crude oil prices portend positive signal for the economy.

He said oil price stability or appreciation, strong dollar liquidity in NAFEM alongside a tight spread to parallel market, stable or increasing foreign reserve data and any form of FX appreciation with low volatility portend positive signals for the economy, and will impact positively on inflation data.

Speaking during Cordros Asset Management seminar titled: “The Naira Playbook”, he said positive impact of CBN’s reforms has continued affect the market and economic indicators positively.

Also, inflation targeting framework, which replaces the exchange rate targeting framework, aligns with the apex bank’s determination to bring inflation upsurge under control in line with its price stability mandate.

Analysts said the various oil price shocks, Covid-19 pandemic, and most recently, the war between Russia and Ukraine, and Israel and Iran have resulted in various shocks to the global economy, requiring changing responses to subdue the monetary and fiscal authorities in the advanced and emerging market economies.

The Comercio Partners, in its 2025 macroeconomic outlook, highlighted that the rebasing of Nigeria’s Consumer Price Index (CPI) to 2024 would also create statistical effects that could lower inflation figures.

From the stabilisation of exchange rates, the normalisation of energy prices following the subsidy removal to improved liquidity in the forex market, the economy has what it takes to achieve price stability within the year.

The report emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility.

This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

According to Ifeanyi Ubah, head of investment research and global macro strategist, “We expect headline inflation to decrease to around 15 percent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

In its efforts to tame inflation, the CBN recently hosted the Monetary Policy Forum 2025, featuring fiscal authorities, legislative, private sector, development partners, subject-matter experts, and scholars with the theme: “Managing the Disinflation Process”.

The forum is a major push to improve monetary policy communication, foster dialogue, and collaborate on critical issues shaping monetary policy.

During the event, CBN Governor, Olayemi Cardoso explained that the apex bank’s focus is to sustain price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship.

He said the apex bank is continuing its disciplined approach to monetary policy, aimed at curbing inflation and stabilising the economy.

“These actions have yielded measurable progress: relative stability in the FX market, narrowing exchange rate disparities, and a rise in external reserves to over $40 billion as of December 2024.”

Cardoso reiterated that the goal of the CBN is to ensure that monetary policy remains forward-looking, adaptive, and resilient.

In addressing our economic challenges, collaboration is key: “Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence,” Cardoso said.

“Our focus must remain on price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship,” he added.

The CBN also focused on strengthening the banking sector, introducing new minimum capital requirements for banks (effective March 2026) to ensure resilience and position Nigeria’s banking industry for a $1 trillion economy.

These reforms and developments reflect the Bank’s commitment to creating an enabling environment for inclusive economic development. However, achieving macroeconomic stability requires sustained vigilance and a proactive monetary policy stance.

“As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and staying focused on its core mandate of price stability,” Cardoso stated.

He said moving from the exchange rate targeting framework to the inflation targeting framework aligned with the apex bank’s determination to bring inflation upsurge under control in line with its price stability mandate.

Inflation uptick has remained a major concern to the CBN and is the time to use monetary policy tools to control it.

Already, the data from the National Bureau of Statistics (NBS) showed that Inflation Rate in Nigeria increased to 34.80 percent in December from 34.60 percent in November of 2024. Inflation Rate in Nigeria is expected to be 32.00 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations.

Market data showed that the various oil price shocks, Covid-19 pandemic, and most recently, the war between Russia and Ukraine, have resulted in various shocks to the global economy, requiring changing responses to subdue the monetary and fiscal authorities in the advanced and emerging market economies.

To address these shocks, the CBN plans to migrate from an exchange rate targeting framework to phased migration and now inflation targeting framework.

The CBN has been controlling the growth of money supply to achieve price stability, but is seeking a change of strategy to achieve better results.

The World Bank recently gave a positive verdict on Nigeria’s economic growth trajectory, highlighting three-year unbroken growth for the country.

In the bank’s Global Economic Prospects for June, the bank posited that Nigeria will have three-year unbroken growth records- growing at 3.6 per cent in 2025, 3.7 per cent in 2026 and 3.8 per cent in 2027.

The World Bank however, slashed its global growth forecast for 2025 by 0.4 percentage point to 2.3 per cent, saying that higher tariffs and heightened uncertainty posed a “significant headwind” for nearly all economies.

In its twice-yearly Global Economic Prospects report, the bank lowered its forecasts for nearly 70 per cent of all economies – including the United States, China and Europe, as well as six emerging market regions – from the levels it projected just six months ago before U.S. President Donald Trump took office.

The bank stopped short of forecasting a recession, but said global economic growth this year would be its weakest outside of a recession since 2008. By 2027, global gross domestic product growth was expected to average just 2.5 per cent, the slowest pace of any decade since the 1960s.

The bank said global inflation was expected to reach 2.9 per cent in 2025, remaining above pre-COVID levels, given tariff increases and tight labor markets.