CBN May Cut Policy Rate To 25.50% By Year-End, Says BMI

… Forecasts September Rate Cut As Inflation Drops To 22.2%

Financial Analysts at BMI, a Fitch Solutions Company, have projected that the Central Bank of Nigeria (CBN) will begin a gradual monetary policy easing cycle in the third quarter of 2025, lowering its benchmark interest rate from the current 27.50 per cent to 25.50 per cent by year-end.

The anticipated shift comes after the Monetary Policy Committee (MPC) opted to leave rates unchanged at its July meeting, citing persistent underlying price pressures, ongoing global economic uncertainties, and the potential inflationary impact of trade tensions and geopolitical instability.

The research firm’s outlook, which aligns with the consensus among economists surveyed by FocusEconomics, suggests that the easing cycle will commence in September with a 100-basis-point cut.

This view is underpinned by evidence of sustained disinflation in the economy, with Nigeria’s headline inflation rate dropping from 24.5 per cent year-on-year in January to 22.2 in June.

BMI attributes the slowdown to more stable fuel prices, the absence of fresh fiscal deficit monetisation by the CBN, and reduced growth in broad money supply.

According to them, data from the first quarter of 2025 show that the spread between nominal GDP growth and M2 growth narrowed to just seven percentage points, marking the lowest differential in two years.

This, coupled with a relatively stable naira exchange rate, has helped contain imported inflationary pressures, particularly on consumer goods.

The CBN’s monetary tightening in prior quarters has pushed the real policy rate into positive territory—5.3 per cent as of June—providing policymakers with room to ease without immediately undermining price stability.

Looking ahead, BMI forecasts that September’s rate cut will be the first in a sequence of adjustments continuing through 2026, with the policy rate expected to decline further to 21.50 per cent by the end of that year.

The pace of easing is likely to accelerate from the fourth quarter of 2025, as the inflationary effects of the 2024 fuel subsidy removal fade from annual comparisons.

Average inflation is expected to moderate from 21.5 per cent in 2025 to 18.0 per cent in 2026, creating more breathing room for the CBN to stimulate economic activity through lower borrowing costs.

However, analysts cautioned that Nigeria’s interest rates will remain high by both historical and comparative standards.

The inflation outlook continues to face significant structural risks.

Insecurity in agricultural belts is expected to keep food inflation elevated, while the phased removal of electricity subsidies will add upward pressure to consumer prices over the medium term.

BMI emphasised that such persistent pressures could cap the extent of monetary easing, even in a disinflationary environment.

On the external side, the CBN’s tight monetary stance has succeeded in attracting short-term capital inflows. Portfolio investments more than doubled in the first five months of 2025 compared with the same period last year, driven primarily by demand for high-yield money market instruments.

While the inflows have provided temporary relief to Nigeria’s foreign exchange liquidity, BMI warned that they are unlikely to result in a structural strengthening of the balance of payments.

Nigeria remains heavily reliant on crude oil exports and continues to attract only minimal foreign direct investment, which represented just 0.4 per cent of GDP in the first quarter of 2025.

Risks to the outlook, according to BMI, are skewed towards slower easing. Should inflation prove stickier than projected owing to escalated insecurity in food-producing areas, renewed increases in domestic fuel prices, or a fresh surge in global trade frictions the CBN could delay further cuts or proceed at a more cautious pace.

Conversely, a faster-than-expected decline in inflation could allow for more aggressive policy adjustments, although this is not BMI’s base case.

In its analysis, BMI underscored that the CBN’s monetary policy decisions over the next 18 months will balance the need to sustain disinflation with the imperative to avoid stifling growth.

While elevated rates are attracting much-needed foreign currency inflows, the real challenge remains addressing the structural weaknesses in Nigeria’s economy, which continue to limit the country’s capacity to achieve long-term price stability and sustainable external financing.

CBN May Cut Policy Rate To 25.50% By Year-End, Says BMI is first published on The Whistler Newspaper