Global tensions shape CBN’s monetary policy

Global tensions shape CBN’s monetary policy

The Central Bank of Nigeria’s monetary policy is increasingly being shaped by global geopolitical  tensions,  as  the Middle East  crisis  complicates  inflation management,  delays interest rate cuts and heightens risks to exchange rate stability and economic growth, SAMI TUNJI reports

For the CBN, the ongoing Middle East crisis is not a distant geopolitical event. It is a direct threat to Nigeria’s inflation outlook, exchange rate stability, production costs and household purchasing power.

That link was central to the decision of the Monetary Policy Committee to retain the Monetary Policy Rate at 26.5 per cent after its 306th meeting in Abuja on  20 and 21 July 2026. The committee also retained the standing facilities corridor around the MPR at plus 50 and minus 450 basis points, while maintaining the Cash Reserve Requirement at 45 per cent for deposit money banks, 16 per cent for merchant banks and 75 per cent for non-Treasury Single Account public sector deposits.

Reading the communiqué, the CBN Governor, Olayemi Cardoso, said the committee’s decision followed a detailed assessment of risks confronting the Nigerian economy. Although inflation declined marginally in June, he said uncertainty had increased because of renewed hostilities in the Middle East and their potential effects on international energy prices.

“In view of the evolving developments, maintaining a cautious monetary policy stance remains appropriate,” Cardoso said.

The concern is understandable. The Strait of Hormuz is one of the most important energy transit routes in the world. Data from the United States Energy Information Administration show that oil flows through the strait averaged 20.9 million barrels per day in the first half of 2025, equivalent to about 20 per cent of global petroleum liquids consumption. Any disruption to that route can quickly reduce supply, increase freight and insurance costs and lift crude oil and refined product prices across markets.

The risk became more visible in early 2026. The EIA said military action in the Middle East and the subsequent effective closure of the Strait of Hormuz pushed crude oil and petroleum product prices higher during the first quarter. Brent crude reportedly reached $138 per barrel on 7 April and averaged $117 per barrel in April, while disruptions led several Gulf producers to shut in millions of barrels of production.

Although shipping traffic later improved following efforts to reopen the strait, the energy market had not fully returned to normal by July. The EIA projected Brent crude to average $81.91 per

barrel in 2026, compared with $68.91 in 2025, before falling to about $64.76 in 2027 as production and trade flows recover.

For Nigeria, higher crude prices produce a complicated outcome. As an oil exporter, the country can earn more foreign exchange and collect more petroleum-related revenue when international prices rise. Cardoso said gross external reserves increased from $50.47bn at the end of May to

$52.52bn by July 17, supported mainly by crude oil-related tax receipts and third-party inflows.

However, the gains are not automatic. Nigeria remains exposed to imported refined petroleum products, fertiliser, machinery, raw materials and transportation inputs. The PUNCH recently reported that Nigeria’s petrol importation surged 207 per cent in June 2026, even as domestic Premium Motor Spirit (petrol) supply fell 22 per cent, according to the latest data released by the Nigerian Midstream and Downstream Petroleum Regulatory Authority. Higher international energy prices can therefore raise the cost of diesel, aviation fuel, imported components and shipping. Those increases are transmitted into food distribution, manufacturing, construction and services.

In its July 2026 World Economic Outlook Update, the International Monetary Fund  warned that rising prices of essential goods could deepen poverty and worsen food insecurity in Nigeria despite recent improvements in the country’s macroeconomic stability. It added, “The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions.”

This is the dilemma confronting the MPC. Cardoso said the severe and prolonged escalation of the Middle East conflict remained the major risk to Nigeria’s economic outlook. Higher oil prices may strengthen reserves and government revenue, but they can simultaneously increase domestic prices, widen production costs and place pressure on the naira if the import bill rises.

Rate cuts delayed

The most immediate consequence of the global tensions is that they have reduced the likelihood of another early interest rate cut.

The CBN had lowered the MPR by 50 basis points to 26.5 per cent in February 2026, marking a shift from the aggressive tightening cycle of the current CBN leadership.

It retained the rate at its May meeting and again in July, meaning the initial move towards monetary easing has stalled.

On the surface, the inflation numbers appeared to offer the MPC some room. Headline inflation declined marginally from 15.93 per cent in May to 15.91 per cent in June, ending three consecutive months of increases. Core inflation also fell from 16.82 per cent to 15.92 per cent, while month- on-month headline inflation slowed from 1.75 per cent to 1.66 per cent. Yet the composition of inflation gave the committee little comfort. According to the National Bureau of Statistics, food inflation rose from 16.96 per cent in May to 17.52 per cent in June.

That divergence matters. Core inflation is more responsive to exchange rate stability and interest rate policy, while food inflation in Nigeria is heavily influenced by insecurity, weather, poor storage, transport costs, farm productivity and disruptions along supply routes. A central bank can reduce demand and stabilise the currency, but it cannot directly reopen rural roads, protect farmers or eliminate post-harvest losses.

This means that the CBN’s tightening may be working in areas it can influence, while the most

politically sensitive part of inflation remains driven by structural conditions outside its control.

During the question-and-answer session, Cardoso said the bank had previously expected Nigeria to be firmly moving towards single-digit inflation by early 2027. However, he acknowledged that unexpected external shocks had complicated that trajectory.

“These were shocks that came that were not anticipated in that manner, and have gone on a lot

longer than could have been anticipated,” he said.

Cardoso nevertheless maintained that the slight moderation in headline inflation indicated that the

CBN’s tools were producing results.

“Headline has moderated. So that gives us an indication of the fact that the tools that we have

implemented so far are bearing effect,” he said.

The claim is partly supported by the decline in core inflation and reduced exchange rate volatility. However, holding the MPR at 26.5 per cent imposes costs on businesses and households. Commercial lending rates remain elevated, investment decisions become harder, and firms with large working-capital requirements face higher financing expenses.

The PUNCH recently reported that about 61.1 per cent of Nigerians want the CBN to reduce interest rates. However, 27.8 per cent favour retaining the current benchmark rate, while 11.1 per cent support a further increase, according to the CBN’s June 2026 Inflation Expectations Survey Report.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, earlier told The PUNCH that the inflation outlook remained uncertain because of the ongoing energy crisis linked to the Middle East conflict, making an immediate rate cut unlikely.

“For as long as this crisis persists, the inflation outlook will continue to look very gloomy because this crisis is strongly correlated with the energy crisis. The chances of dropping the rate remain very slim for as long as we have this crisis,” Yusuf said.

He added that businesses would continue to contend with elevated financing costs and urged the

Federal Government to expand intervention funding through development finance institutions. Naira safeguard

The exchange rate has become one of the CBN’s most important defences against imported

inflation.

Nigeria’s dependence on imported machinery, industrial inputs, petroleum products, medicines and food-related commodities means that naira depreciation can quickly raise domestic prices. When the local currency weakens, importers need more naira to obtain the same amount of foreign exchange. The increased cost is passed to wholesalers, retailers and consumers.

Cardoso attributed the decline in core inflation in June largely to exchange rate stability. This suggests that the CBN sees the forex market not merely as a financial market but as a central component of its inflation strategy.

Asked about an IMF assessment suggesting that the naira was undervalued, Cardoso did not

endorse a particular exchange rate. Instead, he defended the CBN’s market-led approach.

“Our view is one of continuing on the path that we had embarked on, and that is to ensure that we have a market that is transparent, that is liquid, and one that has a willing buyer, willing seller,” he said.

He described the exchange rate as a moving target whose eventual level must be supported by economic fundamentals, including oil exports, foreign direct investment and stronger domestic productivity to reduce imports.

The real test of exchange rate stability will therefore be whether it can survive a prolonged global shock without excessive intervention or a resurgence of market distortions.

Stability before growth

Cardoso’s broader message was that Nigeria must first secure macroeconomic stability before it can attract the investment required for stronger and more inclusive growth.

“One of the most fundamental shifts that has taken place over the past couple of years is the stability of our system,” he said. “Without that stability, you don’t get investment. And without that investment, you don’t get the growth that we need.”

This argument sits at the centre of the CBN’s policy defence. High interest rates, tighter liquidity, banking reforms and a market-led exchange rate impose immediate costs, but the bank believes they are necessary to rebuild confidence after years of inflation, currency shortages and policy uncertainty.

Nigeria’s economy expanded 3.89 per cent in real terms in the first quarter of 2026 amid a decline in crude oil production, with growth driven largely by agriculture, telecommunications, financial services, construction, and trade activities. Data released by the National Bureau of Statistics showed that the country’s Gross Domestic Product grew faster than the 3.13 per cent recorded in the corresponding period of 2025, extending the economy’s recovery momentum amid continued dominance of the non-oil sector.

The IMF noted that Nigeria’s economy would grow by 4.1 per cent in 2026 and 4.3 per cent in

2027, while cautioning that higher prices for basic necessities could offset some of the gains from ongoing economic reforms. In its April 2026 Economic Outlook update, the World Bank adjusted Nigeria’s growth projection to 4.10 per cent for 2026 and 4.20 per cent for 2027, a notable decline from the 4.40 per cent previously forecast for both years.

“The bank’s downward adjustment was driven by several combined factors, including the persistent uncertainty in the global economy, particularly following the Middle East conflict,” investment analysts at Meristem Securities Limited said.

So far, Nigeria’s growth and reforms appear insufficient to produce rapid improvements in living

standards in a country with a population estimated at more than 242 million.

“Strong reforms over the past three years have yielded improved macroeconomic outcomes and built resilience,” the IMF said in a statement after its annual review of the Nigerian economy.

“Still, conditions for many Nigerians remain difficult,” it said.

Nevertheless, the Minister of Finance and Coordinating Minister of the Economy, Mr Taiwo Oyedele, recently said Nigeria and other African countries could not achieve sustainable economic growth without maintaining stable financial systems built on public confidence, warning that monetary and fiscal policies alone would not deliver prosperity if the financial sector remained vulnerable to shocks.

QUOTE

“One of the most fundamental shifts that has taken place over the past couple of years is the stability of  our  system.  Without  that  stability,  you  don’t  get  investment.  And  without  that investment, you don’t get the growth that we need.”

Source: https://punchng.com/global-tensions-shape-cbns-monetary-policy/