In this week’s report, we examine the global shift toward monetary policy pauses amid stubborn inflation, the growing pressure on oil prices from rising supply, and Nigeria’s improving macroeconomic signals. With inflation easing, forex reserves improving, and liquidity rising, we assess whether the Central Bank of Nigeria is likely to cut interest rates—or hold steady—as fiscal pressures and market expectations continue to evolve. Read on…
Major central banks entered 2026 in a cautious mood.
Throughout 2025, economies of advanced nations gradually reduced interest rates after the aggressive tightening cycle of 2022–2024.
However, inflation has not fully returned to target levels, and global uncertainty remains high. As a result, the world’s major monetary authorities have now adopted a “wait-and-see” approach.
In the United States, the Federal Reserve cut rates three times in 2025, bringing the federal funds rate down to 3.50%–3.75%. The primary reason was the emerging weakness in the labour market.
However, inflation remains above the Fed’s 2% target, hovering around 2.7%–3.0%. With economic growth still relatively strong (3.1% year-on-year in Q3 2025), the Fed paused further cuts in January 2026 to assess incoming data.
The Bank of England followed a similar path. After cutting rates by 100 basis points across 2025 due to weak growth and rising unemployment, it held rates steady at 3.75% in early 2026. Inflation has moderated but remains above its 2% target.
Meanwhile, the European Central Bank front-loaded its rate cuts in early 2025, reducing its deposit rate to 2.0%. Since mid-2025, however, it has paused further easing to evaluate the impact of earlier actions.
Across advanced economies, the message is consistent: inflation has slowed, but not enough to justify aggressive easing. Geopolitical tensions — including trade frictions and Middle East risks — are adding to uncertainty.
Oil Market: Supply Likely to Outpace Demand
Oil prices are currently being pulled in two opposite directions.
On one side, geopolitical risks — particularly tensions involving Iran and broader Middle East instability — provide temporary support to prices due to potential supply disruptions.
On the other side, supply dynamics are turning more dominant.
Global oil demand is expected to grow modestly in 2026 (about 850,000 barrels per day). However, global production is projected to rise even faster, especially as weather-related disruptions in North America reverse and OPEC+ considers increasing output from April.
Recent data shows global production temporarily dipped but is expected to rebound strongly. Rising inventories, particularly in the United States, reinforce the likelihood of oversupply.
Unless geopolitical tensions escalate significantly, oil prices are expected to remain under downward pressure.
For oil-importing countries, lower oil prices reduce imported inflation. For oil exporters like Nigeria, it presents a mixed picture — potentially reducing fiscal inflows while easing fuel-related price pressures.
Nigeria’s Domestic Economy: Strong Non-Oil Growth, Weak Oil Output
Domestically, Nigeria’s economy presents a split story.
The non-oil sector has shown strong expansion. The Central Bank’s Purchasing Managers’ Index (PMI) remains comfortably above the 50-point expansion threshold, indicating growth across industry, services, and agriculture.
Improved foreign exchange stability and moderating inflation have reduced input costs. The Naira appreciated modestly in January 2026, supporting production and business activity.
However, the oil sector remains underperforming. Average oil production has declined year-on-year due to structural challenges, including ageing infrastructure, insecurity, and operational disruptions. While modest recovery is expected in 2026, oil output remains below optimal levels.
Overall, economic momentum is currently being driven more by the non-oil sector than by crude production.
Inflation: Clear Signs of Cooling
Perhaps the most important development is Nigeria’s inflation trajectory.
Headline inflation has declined for ten consecutive months, easing to 15.10% in January 2026. More importantly, monthly inflation turned negative for the first time in a year — meaning prices actually fell month-on-month.
Food inflation showed a particularly sharp decline, driven by improved harvests and lower staple prices such as maize, cassava, beans, and eggs.
Core inflation has also moderated, supported by improved exchange rate stability and increased fuel supply from domestic refining capacity.
This sustained disinflation strengthens the argument for a monetary policy rate cut.
Fiscal Position: Rising Debt, but Lower Servicing Costs
Nigeria’s public debt continues to rise, reaching NGN152.4 trillion in Q2 2025.
Both domestic and external borrowing increased. However, debt servicing costs declined significantly during the period, largely due to lower borrowing rates and reduced payments on specific instruments.
While debt levels are increasing, relatively lower interest rates compared to previous periods have provided short-term fiscal relief.
Nevertheless, financing the 2026 budget deficit will likely require additional borrowing. Lower benchmark interest rates would reduce funding costs and ease fiscal pressure.
Monetary Policy: Liquidity Remains High
Despite inflation cooling, liquidity in the financial system remains elevated.
The Central Bank has conducted aggressive Open Market Operations (OMO) to mop up excess cash, issuing trillions of naira in short-term instruments.
Money supply remains elevated, partly due to FAAC inflows and debt maturities. High liquidity complicates monetary transmission and could limit the speed or magnitude of rate cuts.
On the positive side, Nigeria’s external position has strengthened significantly. Foreign reserves have risen to nearly USD48 billion — the highest level in eight years. Oil receipts, portfolio inflows, and improved FX management have stabilized the Naira.
The spread between official and parallel exchange rates has narrowed following targeted FX interventions.
Taken together, macro fundamentals now support a dovish stance. However, system liquidity risks may encourage the Monetary Policy Committee (MPC) to proceed cautiously.
Fixed Income Market: Investors Already Pricing in a Cut
The bond and Treasury bill markets suggest investors expect rate moderation.
Yields rose sharply in early 2026 due to heavy issuance but have since retraced. The 364-day Treasury bill yield now trades significantly below the Monetary Policy Rate (MPR), indicating market anticipation of easing.
Investor demand remains strong, reflecting abundant liquidity and confidence in macro stability.
In effect, financial markets have already priced in a possible rate cut.
Equities Market: Bullish Momentum Continues
Nigeria’s equities market has remained resilient.
Improving macro conditions — easing inflation, FX stability, and strong corporate earnings — have supported investor confidence.
Both domestic and foreign participation have increased. Pension reforms that allow greater equity exposure may further boost liquidity.
If interest rates decline, equities could become even more attractive relative to fixed-income instruments.
Lower borrowing costs would also support corporate profitability, particularly in capital-intensive sectors.
Conclusion: Is a Rate Cut Likely?
The balance of evidence points toward a moderate rate cut.
- Inflation is cooling.
- Reserves are strengthening.
- The Naira is stable.
- Growth remains resilient.
However, elevated system liquidity and global uncertainty could encourage a cautious approach.
The most probable outcome is a calibrated rate reduction — possibly accompanied by technical adjustments to maintain monetary discipline.
Nigeria appears to be transitioning from a tightening cycle to a controlled easing phase.
The key question now is not whether inflation is falling — it clearly is — but whether policymakers believe the trend is sufficiently durable to warrant further loosening monetary conditions.
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