Tackling Inflation with Monetary Policy Tools, Structural Reforms
Dike Onwuamaeze
The steep decline in Nigeria’s inflation rate from 34.8 per cent as of December 2024 to 15.10 per cent in January 2026 was largely driven by the monetary policy easing and positive outcome of key reforms instituted by the Central Bank of Nigeria (CBN).
The reforms enhanced FX stability, spike in foreign reserves to $47 billion and exchange rate stability. As the MPC meets on February 23 and 24th, many stakeholders expect the apex bank-led monetary policy committee to continue prioritizing macroeconomic stability that would accelerate disinflation to single digit, expand FX inflows and support stronger naira
The rapid moderation in inflation rate, rising competitiveness of the naira and growth in foreign reserves all point to a positive phase in Nigeria’s economic journey.
Already, Nigeria’s headline inflation rate dropped to 15.10 per cent in January 2026, down from 15.5 per cent in December 2025, the National Bureau of Statistics (NBS) reported.
The NBS Consumer Price Index (CPI) report for December 2025 also showed that inflation remains significantly lower than the 34.8 percent recorded in December 2024.
The decrease was largely driven by falling prices of tomatoes, garri, eggs, potatoes, carrots, millet, vegetables, plantain, beans, wheat grain, grounded pepper, and onions.
The NBS data underscores continued moderation in price pressures across the country, signaling a positive trend for households and policymakers managing inflationary challenges.
The CBN says structural reforms are beginning to filter through to the broader economy, helping to stabilise the naira and ease lending rates as inflation continues to moderate.
For the apex bank, the monetary policy actions reflect a deliberate strategy to restore macroeconomic stability after years of fiscal and external pressures.
These developments reflect the commitment and focus of the bank’s leadership in restoring stability to the financial system, and lowering lending rates are emerging as one of the tangible outcomes of the CBN’s policy trajectory.
The CBN said alignment of fiscal and monetary policies is indispensable at a time when technological innovation and digital finance are rapidly transforming the financial landscape.
Push for Lower Interest Rate
The CBN-led MPC had last November, retained the benchmark interest rate at 27 per cent, extending its pause on monetary tightening as the bank seeks to consolidate recent progress in stabilising prices, exchange rates, and capital flows. CBN Governor, Olayemi Cardoso, said the MPC voted by a majority “to maintain the monetary policy stance,” adding that members were convinced that the economy required more time for earlier decisions to filter through.
He signaled that the bank was sticking to its disinflation strategy despite calls from parts of the private sector for more easing to reduce borrowing costs.
It was observed that the decision marks the fourth time last year that the MPC has held the benchmark rate steady, following a 50-basis-point cut in September—the only reduction since the aggressive tightening cycle of 2024, during which rates were raised six times to curb inflation and support the naira.
The committee also adjusted the corridor around the benchmark rate to +50/-450 basis points and retained the Cash Reserve Ratio at 45 per cent for deposit money banks, 16 per cent for merchant banks, and 75 per cent for non-TSA public-sector deposits.
The liquidity ratio was kept unchanged at 30 per cent. According to the communiqué, the stance was underpinned by the need “to sustain the progress made so far towards achieving low and stable inflation,” adding that future policy choices would remain “evidence-based and data-driven.”
The bank attributed inflation rate decline to sustained monetary tightening, improved FX market stability, higher capital inflows, and relative calm in fuel prices.
Cardoso noted that investors who had previously stayed away due to volatility were returning, noting that “after stability comes investment, and after investment comes growth.”
He said Nigerians would “in the fullness of time” begin to feel the effect of the current stability as investment strengthened job creation and incomes.
Monetary Policy Decisions Impact
The CBN’s decision adjusting the Standing Facility corridor around the Monetary Policy Rate (MPR) at +50/-450 basis points, represents sanction against banks not keen on lending to real sector.
By adjusting the Standing Facility corridor around the MPR from +250/-250 basis points to +50/-450 basis points, banks taking excess deposits to CBN instead of lending to businesses, will now be paid 450 basis points below the 27 per cent benchmark interest rate.
The Monetary Policy Committee (MPC’s) decision was underpinned by the need to sustain the progress made so far towards achieving low and stable inflation. The MPC reaffirmed its commitment to a data-driven assessment of developments and outlook to guide future policy decisions.
Confirming the development, Managing Financial Derivatives company Limited, Bismarck Rewane, said that by reducing the amount CBN pays to banks taking idle funds to its vaults, will accelerate lending.
For the MPC to adjust the asymmetric corridor, means that the apex bank will not be paying much to banks for keeping money idle at the Central Bank, which is the key thing. Rewane explained that the CBN’s decision, which signals positive yields on short-term assets, will continue to strengthen portfolio capital inflows, support the naira, and reinforce the disinflation path.
“The MPC’s decision also reflects current global trends emphasizing central bank autonomy and independence, as seen in most advanced economies,” he said.
“The next MPC meeting is in February 2026. In the coming days, a cautious “wait-and-see” approach is expected, with T-bill rates and debt management policies under close scrutiny. The naira will likely trade in a range of N1,450–N1,500/$ in the near term, while GDP growth is projected at 3.9 per cent in 2025 and 4.2 per cent in 2026. However, 2026 presents key risks of imponderables and exogenous shocks, including a likely fall in the price of Brent to $55pb,” he said.
Rewane added: “We believe that the MPC will most likely cut the policy rate by 100bps to 26 per cent per annum at its February 2026 meeting. This dovish stance by the CBN should in no way undermine the current gradual decline in inflation.”
Other analysts noted that monetary policy is always conducted by influencing monetary and credit conditions to achieve set macroeconomic goals, and by adjusting the Standing Facility corridor around the MPR, the intension is to boost lending to the domestic economy.
More Loans to Private Sector
The CBN’s money and credit statistics showed that N74.41 trillion credit was extended to the private sector in October.
The figure represents improvement from N72.53 trillion in September, and an increase of about N1.88 trillion represents a month-on-month growth. It represents the strongest positive movement so far in 2025.
On a year-on-year basis, credit to the private sector increased only slightly, from N74.07 trillion in October 2024 to N74.41 trillion in October. The modest annual gain shows that while the stock of private credit is broadly back to where it was a year earlier, the real story is the short-term rebound that followed the September rate cut.
Cardoso said MSMEs remain central to our efforts. Last year alone, microfinance lending expanded by over 14 per cent, and new digital-credit products reached more than 1.2 million small enterprises — evidence of the sector’s growing depth and capacity.
We are improving access to credit, supporting microfinance institutions, and expanding financial products tailored to smaller enterprises.
“The Central Bank of Nigeria will continue to steer monetary policy with discipline, anchored firmly to its core mandate of price stability. Stability remains the bedrock upon which investment flourishes, resources are allocated efficiently, and purchasing power is protected. In 2026, we will deepen engagement with stakeholders, strengthen collaboration with other regulators and international partners, and foster responsible innovation across the financial system,” he said.
Reserves Record Significant Increase
Nigeria’s gross external reserves rose to $46.8 billion as of February 4, marking the highest level in eight years, with capacity to cover 14 months imports for the country.
The reserves position represents an 18.9 per cent increase from $38.88 billion in January 2025. The improvement is attributed to increased oil exports, diaspora inflows, and foreign portfolio investments.
Rewane, said stronger external reserves have helped to ease pressure on the naira, which appreciated by 0.65 per cent to N1,385/$.
“This is the strongest level of the naira in the last two years when it was N1,329.65/$ in May, 2024. Improved reserve buffers have also lifted import cover to 14 months, helping reduce exchange-rate pass-through to inflation, lower input-cost volatility for small and medium-sized businesses, and support household purchasing power and consumer confidence ahead of the pre-election year,” he said.
He estimated the fair value of the naira at about N1,257 to the US dollar.
Rewane posits that the local currency is undervalued by approximately 11 per cent when assessed using the purchasing power parity (PPP) model.
He noted that currencies typically converge towards their PPP-implied values over a five-year horizon.
According to him, the appropriate exchange rate based on current PPP estimates stands at N1,256.79 to the dollar, reinforcing the view that the naira remains below its fair valuation level.
President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the naira has remained stable across market for several months, ending years of volatility in the market.
Other factors driving reserves build up include improved FX inflows, higher oil receipts, increased remittances through official channels and renewed interest from foreign portfolio investors following FX market reforms instituted by the Cardoso-led CBN. Overall, strong reserves position will continue to bolster exchange rate and promote financial sector stability.
Other industry data shows that Nigeria’s external reserves were last at this level on August 27, 2018, when it stood at $45.9 billion.
The reserve build-up signals stronger buffers for import cover and currency stability, reflecting steady inflows and improved foreign exchange management since the forex reforms began, as the country prepares for a general election. The founder/Chief Executive Officer of the Centre for the Promotion of Public Enterprise (CPPE), Dr. Muda Yusuf, hinted at a positive outlook for Nigeria’s external reserves as he does not see anything derailing the forex and fiscal reforms that have brought about stability and improvement in external reserves.
Other analysts said the growth in the external reserves can only be sustained in 2026 if the CBN avoids excessive FX intervention, fiscal authorities are restrained from spending pressures and the FX reforms are not reversed.
They said, ‘’Historically, election cycles in Nigeria tend to introduce policy uncertainty, FX demand pressure, and capital flow reversals. So, while reserves can be sustained in the short term, maintaining this momentum throughout an election year will depend on discipline.
The CBN had, in its 2026 Macroeconomic Outlook for Nigeria, projected that Nigeria’s external reserve would rise to $51.04 billion in 2026, supported by stronger oil earnings, foreign exchange (FX) market reforms, and improved external inflows.
The apex bank said the outlook reflects higher oil revenues, increased bond issuance, sustained diaspora remittances, FX market reforms, and expanded domestic refining capacity.
