At the altar of price stability: Credit, growth and CBN’s balancing act

At the altar of price stability: Credit, growth and CBN’s balancing act

By Dr Tope Fasoranti

“Stability is not everything,” the German economist and former finance minister Karl Schiller once observed, “but without stability, everything is nothing.” Nigeria in mid-2026 increasingly demonstrates the wisdom of the second half of that proposition. It may also be approaching the point at which the first deserves greater attention.

Consider where we stand. Headline inflation declined to 15.91 per cent in June 2026; core inflation stood at 15.92 per cent, though food inflation remained higher at 17.52 per cent. The foreign exchange market is far calmer than in 2023 and 2024, the official rate near ₦1,380 to the dollar and the parallel-market gap under two per cent. External reserves have passed $52 billion, a seventeen-year high; official-channel remittances have surged; and broad money growth has cooled from above 56 per cent in 2024 to under 14 per cent.

These gains reflect restrictive monetary policy and foreign exchange reform, but also fiscal developments, food prices, base effects and supply conditions. The Central Bank of Nigeria deserves credit for the progress made, yet the more important question is what comes next. If stabilisation succeeds, what is stability for? The answer is growth in investment, productivity, employment and real incomes. In a market economy, much of that growth depends on viable businesses obtaining credit at prices that make investment sensible. That is the arithmetic now confronting the Monetary Policy Committee.

Price stability is the mandate, and rightly so

Let us begin from first principles. The CBN Act assigns the Bank responsibility for monetary and price stability, and that priority reflects one of the hardest lessons of economic history. The same Act establishes the Monetary Policy Committee to facilitate the attainment of price stability and to support the economic policy of the Federal Government, so the ordering is deliberate: stability first, growth through it.

Persistent inflation erodes purchasing power and savings, and its burden is uneven: the wealthy shelter in assets and foreign currency, while the wage earner, pensioner and small trader holding cash cannot. Inflation is a regressive tax in all but name. It also reshapes behaviour: contracts shorten, banks compress lending tenors, and firms protect working capital rather than expand productive capacity.

Milton Friedman argued that inflation is always and everywhere a monetary phenomenon. The Nigerian experience reminds us that it can also carry fiscal, exchange-rate and supply-side components. Even so, monetary authorities cannot remain indifferent when inflation becomes entrenched, and no economy builds durable growth on unstable prices.

Seen in this light, the CBN’s tightening cycle was not hostile to growth. The MPR rose from 18.5 per cent in May 2023 to a peak of 27.5 per cent before easing began; in February 2026 the MPC cut the rate to 26.5 per cent, and in July it held that rate and the 45 per cent Cash Reserve Requirement. Those measures imposed costs, but they were necessary to restore credibility, and they are working.

But stability is a means, not the destination

Here, however, a second principle deserves equal prominence: price stability is instrumental, not terminal. No nation eats its consumer price index. The purpose of stable prices is an environment in which households can plan, businesses can invest and the economy can generate productive employment. The distinction matters more as disinflation progresses.

With the policy rate at 26.5 per cent, borrowing costs remain elevated, and many projects viable under normal financial conditions cannot justify borrowing. The pain is sharpest for small and medium enterprises: large firms can turn to retained earnings, commercial paper, bonds or foreign credit lines; a smaller manufacturer or agribusiness usually cannot.

The 45 per cent CRR adds a further constraint. Not every deposit is mechanically 45 per cent idle, but a high reserve requirement raises the opportunity cost of intermediation and limits what banks can deploy. Meanwhile, high yields on government and central-bank securities offer a powerful alternative to private lending. Why should a rational bank assume credit risk, monitoring costs and possible default when sovereign paper pays handsomely?

The fault lies in the incentives banks face, and no moral judgement of bankers changes it. When those incentives consistently favour government paper, monetary restraint begins to constrain the very investment required for the next phase of growth.

At what point does the sacrifice become too costly?

We arrive at the central question: at what point should growth cease to be sacrificed at the altar of price stability?

Economics cannot name the date, but it can supply the framework. The sacrifice ratio captures the output cost of disinflation: when inflation is high and expectations are unanchoring, near-term losses are justified, because entrenched inflation destroys far more value than temporary restraint. Nigeria was close to that position in 2023 and 2024.

But the calculation changes as inflation falls: the marginal benefit of additional restriction declines while the cumulative cost to investment and credit rises.

The ex-post gap between the policy rate and headline inflation now exceeds ten percentage points. The gap is an imperfect measure of the stance, since policy should be forward-looking, but it shows how restrictive conditions have become.

The principled answer is straightforward: growth should be sacrificed only for as long as, and only to the extent that, the sacrifice continues to purchase durable price stability. The pivot should come when the evidence is sufficiently convincing.

What should the MPC look for?

The debate should therefore turn on what evidence would show inflation sufficiently contained to permit easing without destabilising expectations. Five indicators deserve close attention.

The first is sustained core disinflation. Headline inflation can fall on temporary food or energy movements; core inflation, still 15.92 per cent in June, better reveals underlying pressure; the MPC should look for a sustained trend, not one or two favourable readings.

The second is food inflation, which at 17.52 per cent remains above the headline rate; given the weight of food in household budgets, particularly among lower-income Nigerians, disinflation cannot be declared complete while food prices remain vulnerable.

The third is inflation expectations. The CBN has strengthened its expectations surveys as it moves toward a forward-looking framework; once households and firms believe inflation will keep falling, wage-setting and pricing begin to reinforce disinflation.

The fourth is exchange-rate stability: not a particular level, but an orderly, liquid and credible market in which easing does not trigger destabilising currency pressure.

The fifth is liquidity and money growth: rate cuts cannot succeed if excess fiscal or monetary liquidity floods the system, so rate policy, reserve requirements and liquidity management must move together.

Sequencing matters

Jan Tinbergen taught that one instrument cannot efficiently pursue multiple independent targets: the interest rate cannot simultaneously deliver maximum disinflation, maximum credit growth, exchange-rate stability and rapid GDP expansion.

The answer is sequencing: first restore stability, then protect credibility, then gradually allow financial conditions to support investment.

The CBN increasingly appears to recognise this. Its transition toward inflation targeting is designed to anchor expectations around a clearer nominal objective; the new Nigerian Overnight Financing Rate should improve money-market transparency and policy transmission; and the banking recapitalisation programme should expand banks’ capacity for productive lending.

Only last week, the Bank eased discount-window restrictions, restored tenored repo operations and widened access to its open market operations, reforms it explicitly framed as strengthening liquidity management and policy transmission.

They matter because cutting the MPR alone will not produce productive credit. A reduction that merely adds liquidity would achieve little. Worse, if that liquidity flowed into foreign exchange or speculative assets, premature easing could undo the stability already achieved.

The objective must be not simply cheaper money, but better transmission from monetary conditions into productive investment.

The pivot should come from strength

Friedman’s other lesson was that policy operates with long and variable lags, and that cuts both ways: earlier tightening may still be working through the economy, while easing today will take months to be felt.

The MPC has reason for caution, because credibility should not be spent casually. But caution must not become inertia: there is a difference between waiting for evidence and waiting for certainty, and central banks never enjoy the latter.

Nigeria may be approaching the point at which the balance of risks shifts, but the data must confirm it.

If those five conditions improve over several months, easing should proceed gradually and be clearly communicated: the policy rate declining in calibrated steps, reserve requirements normalised progressively, the pace governed by data rather than a timetable.

Just as importantly, watch what banks do with the liquidity. The true test of normalisation will not be a lower MPR on a communiqué, but whether viable businesses gain reasonably priced credit and investment and employment respond without reigniting inflation.

The altar of price stability was never meant to require the permanent sacrifice of growth. Nigeria has paid a substantial price to restore it; the task now is to protect those gains while preparing for the next phase.

When the evidence permits, the pivot will not represent an abandonment of price stability. It will represent its dividend.

*Dr Fasoranti is an Economist, Banker and Enterprise Transformation Strategist