Nigeria's Monetary Policy Crossroads: Disinflation, Fiscal Strain, and the 2026 Pivot

The Central Bank of Nigeria has chosen a deliberate pause. After a 50 basis point cut in September to 27%, the Monetary Policy Committee has held the line, describing its stance as a "firm halt" to consolidate gains. This decision reflects a cautious calculus: while inflation has shown clear signs of cooling, the bank views the progress as fragile and not yet on firm ground. Its priority is to "sustain the progress made so far toward achieving low and stable inflation," a goal that currently outweighs the immediate pressure for further easing.

This policy firmness is directly challenged by a severe fiscal strain. The government's 2026 budget is already under immense pressure, with more than a quarter of its about 58 trillion naira ($40 billion) allocation earmarked for interest payments. With muted oil income forecast to keep revenues near 34 trillion naira, this leaves a budget deficit of roughly 24 trillion naira. The result is a vicious cycle where high borrowing costs consume a disproportionate share of the state's income, leaving less for growth-enhancing investment and widening the fiscal shortfall.

The CBN's confidence in its structural reform agenda is now the critical anchor for its 2026 outlook. The bank is betting that the cumulative impact of financial sector, foreign exchange, and tax reforms will drive a sustainable economic turnaround. Its official projections call for economic growth of 4.49 percent in 2026, alongside a moderation in inflation to an average of 12.94 percent. This forecast signals cautious optimism, hinging on the stabilization of the foreign exchange market and higher oil output. The central bank's patience is not passive; it is a strategic wait for these structural gains to materialize, providing the real economic foundation needed to eventually lower the cost of capital without reigniting price pressures.

The Disinflation Narrative and Its Fragility

The central bank's disinflation narrative is built on a seven-month streak of declines, with headline inflation cooling to 16.05% in October. Yet Governor Olayemi Cardoso has made it clear that this progress is not enough. He insists inflation remains "too high" for a cut, framing the current 27% policy rate as a necessary anchor to sustain the trajectory toward the bank's ultimate goal of single-digit price pressures. This stance underscores a critical tension: the data shows cooling, but the central bank views the level as still dangerously elevated.

A significant risk to this narrative is a potential temporary spike in December. The National Bureau of Statistics has projected an "artificial spike" in the inflation rate for that month, directly attributable to a base effect from the 2025 rebasing of the consumer price index. When the new index was launched, December 2024 was set as the base month with an index value of 100. This mathematical artifact means that comparing December 2025 prices to that specific, low base will likely produce a distorted, upward reading. Such a spike, even if fleeting, could complicate the central bank's messaging and provide a rationale for further delay.

Despite this near-term caution, the Governor has opened a path forward. He has signalled that "policymakers may begin cutting interest rates next year", contingent on a sustained disinflationary trajectory. This conditional signal hinges on three key conditions: continued cooling in inflation, improved foreign exchange liquidity, and stable economic activity. The recent adjustment to the standing facility's corridor-effectively cutting the deposit rate-was interpreted by analysts as a "very significant de facto easing" that signals confidence in these very conditions. In other words, the central bank is preparing the ground for a pivot, but it will wait for the disinflation story to be written in the data, not just the headlines.

Financial Market and Sector Implications

The central bank's conditional signal for a 2026 pivot is already reshaping financial market expectations. Analysts anticipate that the prospect of easing will drive a flight to duration, with increased demand for medium- to long-dated bonds. This positioning is expected to compress yields more quickly, particularly if disinflation accelerates. The market's forward view is clear: a downward shift in yields is on the table, with specific recommendations to accumulate bonds maturing in 2033 and 2035.

This shift carries direct fiscal benefits. Lower government borrowing costs would free up revenue currently consumed by debt servicing. Finance Minister Wale Edun has explicitly noted that lower inflation and borrowing costs would free up revenue currently spent on servicing debt and improve the fiscal balance. With more than a quarter of the 2026 budget already earmarked for interest payments, this relief is critical for narrowing the projected deficit. The government's own efforts to boost revenue through digitization and automation are designed to complement this easing, aiming to meet targets without further straining the budget.

The sustainability of this positive feedback loop, however, rests on two structural pillars. First, the foreign exchange market must remain stable. The central bank's own forecast cites stable forex markets as a key driver for disinflation, and analysts believe the anticipated easing is unlikely to pressure the Naira if credible progress continues. Second, stronger non-oil growth is essential. The central bank projects stronger non-oil growth as a source of momentum, which would broaden the economic base and reduce reliance on volatile oil income. Without these inputs, the disinflation needed to support a sustained easing cycle could falter.

For sectors, the outlook is mixed. The equities market should see a supportive tailwind, with a clearer path to lower rates expected to strengthen the corporate earnings outlook, especially for interest-sensitive industries. Yet the banking sector faces a headwind, as a lower rate environment will compress net interest margins. The scale of this impact will depend on the pace of the central bank's moves. In the near term, the market's focus remains on the conditions Governor Cardoso has laid out: sustained disinflation, improved forex liquidity, and stable activity. The pivot is anticipated, but its timing and impact are contingent on these real economic fundamentals holding firm.

Catalysts and Risks for the Thesis

The path to a policy pivot is now defined by a few critical forward-looking signals. The primary catalyst is the trajectory of inflation data in the first quarter of 2026, which will determine whether the central bank can confidently move past the December base effect spike. The National Bureau of Statistics has projected this "artificial spike" in December, a mathematical artifact from the 2025 rebasing that sets December 2024 as a low base month. The resolution of this distortion in January and February reports will be the first real test. If disinflation resumes its steady climb in those months, it will validate the central bank's conditional signal for easing. The earliest realistic window for a policy recalibration is the February 2026 CBN meeting, which analysts have already flagged as a key date to watch.

The key risk to this thesis is a resurgence of inflation driven by external shocks or domestic supply constraints. The central bank's own forecast relies on stable forex markets and stronger non-oil growth to sustain disinflation. Any significant volatility in the foreign exchange market, or a shock to food or fuel supply chains, could reignite price pressures. Governor Cardoso has also cited "lingering global uncertainties" as a reason for caution, highlighting the vulnerability of Nigeria's import-dependent economy to external volatility. If inflation stalls or rises again, the bank's priority to "sustain the progress made so far" would likely force another delay, prolonging the high borrowing costs that strain the fiscal anchor.

Market watch should therefore focus on two sets of data. First, the actual inflation prints for January and February 2026, to see if they confirm the pre-December trend. Second, the stability of the foreign exchange market and the pace of non-oil sector expansion. The central bank's confidence in these conditions, as signaled by the recent adjustment to the standing facility corridor, is the real foundation for its easing path. Without credible progress on these fronts, the anticipated flight to duration and the fiscal relief from lower borrowing costs will remain on hold. The setup is clear: a data-dependent pivot is in the offing, but the bank will wait for the disinflation story to be written in the numbers, not just the headlines.