By far the bigger problem, though, is that the CBN’s ability to function properly, by anchoring inflation expectations, for instance, is stymied if people expect the accommodative monetary policy to continue. An inflationary spiral — inflation expectations rise, leading to demands for higher wages and prices, which then fuel a new round of rising prices — is but one risk.
About a week ago, the National Bureau of Statistics (NBS) released the inflation figures for last month. According to our official bean counters, “In July 2025, the headline inflation rate eased to 21.88% relative to the June 2025 headline inflation rate of 22.22%.” Expectedly, there was much backslapping within government circles where the need to point to evidence of the correctness of the current government’s reform trajectory continues to do battle with (what remains of) the opposition’s constant reminder that on account of the Tinubu government’s policies, poverty currently sashays down the country’s main streets and scavenges its alleys, far more assuredly than it has done in a long while.
As usual, the devil is in the description. And the details of the latest inflation figures is more striking than the fact that, as the Financial Derivatives Company Limited put it, in its commentary on the NBS’s numbers, “Core inflation is currently above the 91-day secondary market T/bills rate of 15%. This signifies a negative rate of return”. The arithmetic of negative real interest rates is not Space X-class. The implications for the economy, much more so. First the arithmetic. The real interest rate is what is left after you back inflation out from the nominal risk-free rate. And the immediate effect of a negative value is that money lent or saved in safe assets actually loses purchasing power over time.
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In the 10 years to the end of Mr Godwin Ifeanyichukwu Emefiele’s tenure as governor of the Central Bank of Nigeria, we witnessed Nigeria’s most egregious example of macroeconomic policy predicated on interest rates lower than the levels at which the market would have balanced the domestic demand for and supply of money. Also known as “financial repression”, the Central Bank advertised its policies as necessary for providing fillip to local entrepreneurs. But when you include the rapacity with which the bank monetised the Federal Government’s deficit, the only cost that was held down by that monetary policy environment was that of government borrowing.
Simply put, debt becomes “cheaper” to repay since repayments are worth less in real purchasing power. However, with government’s bulimia for borrowing unleashed, much of what the below-market money rates does is to crowd out private sector credit in favour of government-type borrowing.
And this is as it should be. Economic literature predicts that in a negative real interest rate environment, the government benefits because high inflation reduces the real burden of its debt. Ideally, private borrowers should benefit also. But this only happens if they can borrow at nominal rates below inflation, since they repay with money that is “cheaper” in real terms. Simply put, debt becomes “cheaper” to repay since repayments are worth less in real purchasing power. However, with government’s bulimia for borrowing unleashed, much of what the below-market money rates does is to crowd out private sector credit in favour of government-type borrowing.
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That is not all. For so long as the CBN is “behind the curve”, in its fight against inflation, the following categories of economic actors will suffer. People who keep their money in bank deposits or government securities. These will watch their purchasing power eroded. Put this way, negative real interest rates are a tax on domestic savers (especially pensioners or those on fixed incomes) that transfers wealth to borrowers and governments. We could take our chance on the government’s more efficient use of the borrowed monies. However, this wealth transfer incentivises a further set of perverse (at least, for the economy’s medium- to longterm outlook) responses.
Investors seek riskier assets (stocks, real estate, speculative ventures) in search of positive real returns. And this, as may already be the case in the real estate industry, can fuel asset bubbles if the risk-taking gets excessive. Over the last decade or so, we have seen domestic investors, especially at the retail level, shift into dollar holdings and bitcoins to protect the value of their savings. Capital flight and the naira’s weakness are a continuing vulnerability.
The point that we need keep in mind, here, is that whatever decisions one makes in an economy, there are always costs to be borne. The goal, then, is to ensure that the benefits of policy mixes exceed their costs.
In managing monetary conditions of this sort, the central bank faces an obvious dilemma. Leave things as they are, and watch the economy continue its slow-motion reversal, one consequence of elevated capital misallocation risk. Or raise rates above inflation. And risk fiscal stress, following a rise in government’s domestic debt service costs. Followed by a recession. The point that we need keep in mind, here, is that whatever decisions one makes in an economy, there are always costs to be borne. The goal, then, is to ensure that the benefits of policy mixes exceed their costs.
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By far the bigger problem, though, is that the CBN’s ability to function properly, by anchoring inflation expectations, for instance, is stymied if people expect the accommodative monetary policy to continue. An inflationary spiral — inflation expectations rise, leading to demands for higher wages and prices, which then fuel a new round of rising prices — is but one risk. In the end, once Nigerians no longer believe holding naira assets can preserve value, confidence in the CBN evanesces.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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