CBN’s price stability gains now face a tougher test: reviving credit and growth

Nigeria's Central Bank of Nigeria (CBN) has made significant strides in achieving price stability, but the true test now lies in reviving credit and economic growth. As German economist Karl Schiller once noted, stability is essential, but without it, everything is meaningless. Nigeria's recent experience demonstrates that stability is indeed crucial, as inflation has declined to 15.91% in June 2026, and the foreign exchange market has become more stable. However, the question remains: what comes next?

The primary goal of stable prices is to create an environment where households can plan, businesses can invest, and the economy can generate productive employment. Rising inflation erodes purchasing power and savings, disproportionately affecting the poor. It also influences behavior, such as shortening contracts, compressing lending tenors, and protecting working capital.

While the Monetary Policy Committee (MPC) has taken steps to tackle inflation, such as raising the policy rate from 18.5% in May 2023 to 27.5% and implementing a 45% Cash Reserve Requirement, these measures have come at a cost.

The sacrifice ratio quantifies the output cost of disinflation. When inflation is high and expectations are unstable, near-term losses are acceptable, as entrenched inflation destroys more value than temporary restraint. However, as core inflation falls, the marginal benefit of additional restriction diminishes, while the cumulative cost to investment and credit rises. The CBN needs to determine when the sacrifice becomes disproportionate and growth should be prioritized over price stability.

Five indicators can help determine this point: sustained core disinflation, stable headline inflation, consistent reduction in the gap between the policy rate and headline inflation, a decrease in the opportunity cost of intermediation, and an increase in the profitability of private lending. When these indicators suggest that inflation is sufficiently contained, the CBN should be prepared to ease monetary policy to stimulate growth and investment.