CBN MPC Likely to Hold Rates as Global Tensions Weigh on Naira

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is scheduled to convene for its second policy-setting meeting of 2025 on May 19th and 20th, at a time when both global and domestic economic landscapes are marked by heightened uncertainty. Analysts at Cordros Research forecast that the MPC will likely adopt a cautious stance by maintaining the Monetary Policy Rate (MPR) at 27.5% and keeping all other policy parameters unchanged.

Since the last MPC meeting, the global economic environment has grown more turbulent, primarily driven by escalating protectionist trade policies from the United States. These developments have heightened concerns about naira stability and capital flow volatility, despite the return to positive real interest rates following Nigeria’s new inflation methodology.

Global Economic Pressures Mount
Recent tariff hikes by the US administration have reignited global trade tensions, prompting central banks across advanced economies to reassess their policy direction. The US Federal Reserve, balancing risks between persistent inflation and a softening labour market, kept its benchmark interest rate unchanged at 4.25%–4.50% in May—its fourth consecutive hold. Despite easing inflation, which dropped to 2.3% in April, and a 0.3% contraction in first-quarter GDP, the Fed signaled continued vigilance.

In contrast, other major central banks have shifted towards monetary easing. The European Central Bank (ECB) slashed key rates by 25 basis points across the board in April, while the Bank of England (BoE) followed suit with a 25bps cut to 4.25% in May. These moves reflect growing concerns about slowing growth across Europe. While trade de-escalation talks have resulted in some tariff rollbacks, the broader risk of sustained global trade restrictions remains, with analysts expecting US rates to stay elevated amid inflationary pressures.

Domestic Recovery Tempered by Inflation and FX Challenges
On the home front, Nigeria’s economic momentum appears to be gaining ground. The CBN’s Purchasing Managers’ Index (PMI) showed consistent expansion, rising from 50.2 in January to 52.3 in March before marginally dipping to 52.2 in April. Growth was led by stronger performance in services, agriculture, and industry, supported by increased consumer demand and softening cost pressures.

Additionally, domestic crude oil production is showing signs of improvement, with average output reaching 1.67 million barrels per day (mb/d) in Q1-25, up from 1.54 mb/d in the same period last year. This uptick is attributed to enhanced pipeline surveillance and gradual investment recovery in the oil sector. As a result, Cordros Research revised its Q1 GDP growth forecast to 3.62% year-on-year and expects full-year growth to hit 3.90% barring major shocks.

Nonetheless, inflation remains a critical concern. While the rebasing of the Consumer Price Index (CPI) complicates inflation assessment, price growth appears to have eased relative to 2024, aided by reduced naira volatility and lower energy prices. However, inflationary risks are skewed to the upside, driven by a weakening naira and external shocks.

The FX market has also come under renewed strain. The naira depreciated by 3.52% month-on-month in April, averaging NGN1,579.80/USD, compared to NGN1,524.27/USD in March. So far in May, the currency has traded between NGN1,589.00 and NGN1,615.00/USD. The drop in international oil prices, capital outflows amid global uncertainty, and increased supply from OPEC+ have placed Nigeria’s external reserves under pressure. Reserves dipped to an eight-month low of USD37.80 billion in April before inching up to USD38.22 billion by May 12, buoyed by CBN’s intensified FX interventions, which amounted to USD2.61 billion between March and April.

Policy Outlook: Holding the Line on Rates
Despite the positive real interest rate indicated by the new CPI data, analysts believe the MPC will remain cautious. The committee is expected to prioritize price stability, manage inflation expectations, and preserve Nigeria’s interest rate differentials to curb capital flight. The risk of undermining investor confidence, especially against the backdrop of a weaker oil market and volatile naira, makes a rate cut unlikely.

Cordros Research anticipates that the MPC will maintain the MPR at 27.5%, alongside all other policy tools, as it navigates the dual challenge of supporting economic growth while guarding against inflation and external sector vulnerabilities.

Stay informed, stay ahead with The Ameh News