Nigeria’s monetary policy is entering a delicate new phase: after years of aggressive tightening aimed at restoring price and foreign-exchange stability, the Central Bank of Nigeria now faces the difficult question of how to create room for credit, investment and economic growth without undoing the gains already achieved.
“Stability is not everything,” German economist and former finance minister Karl Schiller once observed, “but without stability, everything is nothing.”
Nigeria’s experience in 2026 increasingly demonstrates the wisdom of that argument. Inflation has moderated, the foreign exchange market has become more orderly, external reserves have strengthened and monetary growth has slowed significantly.
But another question is becoming harder to ignore: what is stability ultimately for if it does not create the conditions for businesses to invest, expand and create jobs?
That is the balancing act now facing the Monetary Policy Committee of the Central Bank of Nigeria.
Nigeria’s stabilisation gains
The CBN deserves credit for the progress made on monetary and foreign exchange stability.
Headline inflation declined to 15.91 per cent in June 2026, while core inflation stood at 15.92 per cent. Food inflation remained higher at 17.52 per cent, reflecting the continued pressure on household budgets.
The foreign exchange market has also become considerably calmer compared with the turbulence of 2023 and 2024. The official exchange rate has stabilised around ₦1,380 to the dollar, while the gap between the official and parallel markets has narrowed to less than two per cent.
External reserves have risen above $52 billion, reportedly reaching a 17-year high. Official-channel remittances have also increased, while broad money growth has slowed from more than 56 per cent in 2024 to below 14 per cent.
These developments have not been caused by monetary policy alone. Fiscal measures, food supply, base effects and developments in the foreign exchange market have also contributed.
Nevertheless, the CBN’s tightening cycle has played an important role in restoring confidence and containing monetary pressures.
Price stability must remain the foundation
The CBN Act gives the Bank responsibility for monetary and price stability, and there is a strong economic argument for maintaining that priority.
Persistent inflation destroys purchasing power, erodes savings and makes economic planning increasingly difficult.
Its effects are also unequal. Wealthier households can protect themselves through assets, investments and foreign currency holdings, while low-income workers, pensioners and small traders who depend heavily on cash bear a greater share of the burden.
Inflation also changes business behaviour.
When prices are unpredictable, companies shorten contracts, protect working capital and become more reluctant to commit money to long-term investments. Banks, equally, may reduce lending tenors as they attempt to manage inflation and credit risks.
This means that controlling inflation is not inherently anti-growth.
Indeed, stable prices are one of the foundations upon which sustainable growth is built.
But stability is a means, not the destination
This is where the policy debate becomes more complicated.
No economy grows simply because its inflation rate falls. The ultimate objective of economic stability should be an environment in which households can plan, businesses can invest, workers can find productive employment and real incomes can improve.
Nigeria therefore faces a delicate transition.
The Monetary Policy Rate rose from 18.5 per cent in May 2023 to a peak of 27.5 per cent before the easing cycle began. In February 2026, the MPC reduced the rate to 26.5 per cent and retained that rate in July.
The 45 per cent Cash Reserve Requirement has also remained in place.
These measures helped tighten financial conditions, but they have also increased the cost of credit.
For large corporations with access to retained earnings, commercial paper, bonds or international financing, the impact may be manageable. For smaller manufacturers, farmers, traders and other small and medium-sized businesses, expensive credit can make otherwise viable investments impossible.
That creates a difficult question for policymakers:
At what point does the cost of monetary restraint begin to undermine the investment required for economic recovery?
Why banks may prefer government securities
The challenge is not necessarily that Nigerian banks are unwilling to lend.
It is also about the incentives they face.
When government and central-bank securities offer attractive returns with comparatively lower credit risk, banks have less incentive to extend loans to businesses that require monitoring and carry the possibility of default.
A high reserve requirement adds another layer of constraint to financial intermediation.
The result can be a situation where monetary policy succeeds in reducing inflation but simultaneously makes productive private-sector credit more difficult to obtain.
This is particularly significant for an economy such as Nigeria, where expanding manufacturing, agriculture, technology and small businesses is essential for creating jobs and raising productivity.
How much growth should Nigeria sacrifice for stability?
There is no fixed economic formula for determining when monetary tightening has gone too far.
The concept of the sacrifice ratio helps illustrate the dilemma. Disinflation can impose a short-term cost on economic output, but that cost may be justified when inflation is deeply entrenched and expectations are becoming unanchored.
Nigeria arguably faced such circumstances in 2023 and 2024.
But as inflation falls, the calculation changes.
The additional benefit of further monetary restriction may gradually become smaller, while the cumulative cost to investment, employment and credit could continue to increase.
The gap between the policy rate and headline inflation has now become substantial. While that difference alone cannot determine whether monetary policy is too tight, it demonstrates how restrictive financial conditions remain.
The principle should therefore be clear: economic growth should be sacrificed only for as long as the sacrifice is necessary to secure durable price stability.
Five indicators the MPC should watch
The question is not whether the CBN should ease immediately, but what evidence should determine the timing and pace of further easing.
1. Sustained core inflation
Headline inflation can decline because of temporary movements in food, energy or other prices.
Core inflation provides a better indication of underlying price pressures.
With core inflation still around 16 per cent, the MPC would need to see a sustained downward trend rather than rely on one or two favourable monthly figures.
2. Food inflation
Food inflation remains particularly important because food accounts for a significant share of household spending, especially among lower-income Nigerians.
At 17.52 per cent, food inflation remained above headline inflation in June.
A sustained reduction in food-price pressures would strengthen the case for monetary easing.
3. Inflation expectations
What households and businesses expect to happen to prices can influence what actually happens to prices.
If consumers, workers and companies become convinced that inflation will continue falling, wage negotiations, pricing decisions and investment planning can begin reinforcing the disinflation process.
The CBN’s efforts to strengthen inflation expectations surveys will therefore be increasingly important.
4. Exchange-rate stability
The objective should not necessarily be a particular naira-to-dollar exchange rate.
What matters is an orderly, liquid and credible foreign exchange market.
Any monetary easing that triggers renewed pressure on the naira could quickly feed back into inflation and undermine the progress already achieved.
5. Liquidity and money growth
Interest-rate policy cannot operate in isolation.
If fiscal or monetary liquidity expands too rapidly, cutting rates could inject additional pressure into the economy.
Rate decisions, reserve requirements and liquidity management therefore need to work together.
The importance of sequencing
Economist Jan Tinbergen’s principle is particularly relevant here: a single policy instrument cannot efficiently achieve multiple independent objectives.
The interest rate cannot simultaneously deliver maximum disinflation, rapid credit expansion, exchange-rate stability and maximum economic growth.
The solution is sequencing.
First restore stability. Then protect credibility. Then gradually create room for financial conditions to support productive investment.
The CBN appears to be moving in this direction.
Its transition towards an inflation-targeting framework is intended to provide a clearer nominal anchor. The introduction of the Nigerian Overnight Financing Rate should also improve transparency in the money market and strengthen monetary-policy transmission.
The banking-sector recapitalisation programme could further improve banks’ capacity to finance productive economic activity.
Recent liquidity-management reforms, including changes to discount-window restrictions, tenored repo operations and access to open market operations, are also significant.
These reforms matter because cutting the MPR alone does not guarantee cheaper or better credit.
The real test is productive credit
A lower policy rate that simply creates excess liquidity would achieve little.
If additional liquidity flows into foreign exchange speculation, asset markets or other non-productive activities, premature easing could quickly reverse the stability that the CBN has worked to achieve.
The objective should therefore not simply be cheaper money.
It should be better transmission of monetary policy into productive investment.
That means ensuring that viable businesses can access credit at rates that allow them to invest, expand production, employ workers and increase output.
The real test of monetary normalisation will not be the size of the rate cut announced in an MPC communiqué.
It will be what happens after the cut.
Are businesses borrowing more? Are factories expanding? Is agricultural production increasing? Are private-sector investments rising? Are employment opportunities improving?
And, crucially, is all of that happening without a renewed acceleration in inflation?
The pivot should come from strength
The CBN has legitimate reasons to remain cautious.
Monetary policy operates with long and variable lags. Decisions made months ago may still be affecting economic activity today, while the impact of a rate cut could take time to emerge.
But caution should not become inertia.
There is a difference between waiting for evidence and waiting for certainty. Central banks rarely have the luxury of the latter.
If inflation continues to decline, expectations remain anchored, food-price pressures ease, the naira remains stable and liquidity growth remains manageable, the case for gradual monetary normalisation will become stronger.
Any easing should be calibrated, data-driven and clearly communicated.
Reserve requirements could also be normalised progressively as conditions allow, while banks should be monitored to ensure that improved liquidity translates into productive lending rather than speculative activity.
Nigeria needs the dividend of stability
Nigeria has already paid a significant economic price for restoring monetary and foreign exchange stability.
The next challenge is ensuring that those gains translate into something tangible for businesses and households.
The objective of price stability was never to keep the economy permanently restrained.
It was to create the foundation for sustainable growth.
The altar of price stability was never meant to require the permanent sacrifice of growth.
If the evidence shows that inflation is sufficiently contained, allowing financial conditions to support investment will not represent an abandonment of price stability.
It will be its dividend.
Dr Fasoranti is an economist, banker and enterprise transformation strategist.
