In an effort to control Inflation and maintain price stability, the Central Bank of Nigeria (CBN), led by Mr. Olayemi Cardoso, has been gradually raising the Monetary Policy Rate (MPR) since February. In order to reach the final rise of 50 basis points to 26.75% in July, the MPR has been increased by 400 basis points to 22.75% in February, 200 basis points to 24.75% in March, and another 150 basis points to 26.25% in May. By increasing the cost of borrowing, these increases seek to lower company and consumer Investment and expenditure, which will assist to curb demand and manage inflation.
Analysts have encouraged the CBN to re-evaluate its position to assist growth, arguing that the Economy has suffered as a result of this severe monetary tightening. The CBN is dedicated to upholding its Price Stability mandate and giving inflation control precedence over economic growth, even in the face of high borrowing costs and challenging economic conditions. The hazards of unregulated inflation, such as loss of purchasing power and economic instability, are the driving force behind this approach. Even though doing so will hurt the economy temporarily, the CBN feels that retaining credibility in the financial system and luring investment are essential.
Cardoso stated that the bank is confident about future price stability.
Even though it was a smaller rise than in the past, the July MPR hike shows the CBN’s continued commitment to battling inflation. Cardoso stated that the bank is confident about future price stability and is depending on recent fiscal initiatives to handle these difficulties, even in the face of challenges such as food inflation. Analyst opinions regarding the CBN’s approach are divided. Some interpret the CBN’s reduction in MPR rises as an indication that it understands that rate hikes might not be enough to control inflation.
Others think that despite rising Food Prices and a declining value of the Naira, the economy is still in a challenging position. It is believed that the CBN’s concentration on inflation targeting and its interactions with the Private Sector are essential to preserving long-term economic stability. Nigeria’s economic future is still unclear, with both possible positive and negative results, according to expert estimates and present trends. Nigeria’s economy may stabilize if the CBN’s initiatives are successful in reducing inflation.
GDP growth could potentially reach 3% in 2025.
Macroeconomic stability may also be enhanced by the government’s continuing fiscal reforms, which include initiatives to increase food production and rein in governmental spending. According to analysts, Economic Development could pick up steam if inflation is managed by the middle of 2025. GDP growth could potentially reach 3% in 2025, up from the projected 1.9% in 2024. On the other hand, the economy may experience protracted stagnation if inflation is high and the CBN keeps tightening its policy. Slower economic development could result from high borrowing costs continuing to discourage investment and consumer expenditure.
Nigeria’s current economic predicament is comparable to that of other emerging markets—such as Turkey and Argentina—that are dealing with comparable inflationary pressures. Turkey has seen significant inflation and currency depreciation, similar to Nigeria. But despite high inflation, Turkey has adopted a different strategy, drastically cutting interest rates in an effort to spur economy. This has caused the Turkish Lira to fall sharply and has increased inflation, highlighting the dangers of straying from strict Monetary Policy when inflation is high. Conversely, in order to counteract hyperinflation, Argentina has imposed stringent monetary tightening.
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As a result, there has been a severe recession, with a 2.5% GDP contraction in 2023. The experience of the nation serves as a reminder of the possible trade-offs that an aggressive monetary policy may have on social stability and economic progress in the name of fighting inflation. Nigeria has tightened more gradually and cautiously than these other nations, which is indicative of an effort to strike a compromise between the need to prevent a severe Recession and the need to contain inflation. Nigeria’s economic management is complicated by its strong reliance on oil exports and the instability of the global energy markets. To avoid the mistakes made by Argentina and Turkey, the government must diversify its economy and stable its currency.