Current Reforms to the Monetary Policy Framework

The Transition to Inflation Targeting Framework

The Central Bank of Nigeria (CBN) is transitioning from Monetary Targeting Framework to an Inflation Targeting (IT) Framework as part of its strategic vision to enhance monetary policy effectiveness and entrench long-term price stability. Inflation Targeting (IT) is a forward-looking monetary policy framework in which a central bank publicly announces a specific inflation target, either as a point target or a range and commits to achieving it over a defined period. With this, the Bank establishes the primacy of price stability as its main mandate. Conventionally, the target is set in consultation with the Government, while the central bank designs and implements policy actions to achieve it.

Under the current Monetary Targeting Framework in operation since 1974, monetary policy is conducted through the analysis of monetary aggregates to achieve low and stable inflation, based on the traditional view that inflation is primarily a monetary phenomenon. The Central Bank of Nigeria adopted this framework in response to macroeconomic challenges arising from the surge in public expenditure in the early 1970s, driven by post-civil war reconstruction needs and rising crude oil revenues. These pressures, therefore, heightened inflationary tendencies, prompting the adoption of a formal monetary targeting regime. This framework was complemented by the introduction of the Monetary Policy Rate (MPR) and its corridor system in 2006.

With the increasing complexity of Nigeria’s macroeconomic environment, characterised by rapid structural changes over time, and financial innovations, traditional monetary aggregates have become less reliable as policy anchors. It has, therefore, become necessary to shift focus from the use of monetary aggregate to Inflation Targeting Framework marking a strategic decision towards a rule-based and forward-looking monetary policy regime. Ultimately, this reform reflects the CBN’s commitment to recalibrate its policy implementation strategy, enhance transparency and accountability, and strengthen the credibility of monetary policy in Nigeria. It represents a deliberate effort to align the Bank’s operational framework with global best practice, ensuring that monetary policy remains responsive, data-driven, and effective in addressing evolving domestic and external economic challenges.

Benefits of the Inflation Targeting Framework

Improved Anchoring of Inflation Expectations
Enhanced Monetary Policy Transparency, Accountability and Credibility
Forward-Looking and Data-Driven Decision-Making
Improved Monetary-Fiscal Policy Coordination
Improved Public Understanding of Monetary Policy

Key Pillars of the Inflation Targeting Framework

Forward-Looking Monetary Policy Stance: Inflation Targeting is forward-looking and involves the use of inflation forecasts to guide policy.
Transparency & Accountability: Transparency is central to IT, therefore promoting this framework will involve publishing regular monetary policy/inflation reports and policy decisions, as well as providing forward guidance. This strengthens accountability, aligns expectations, and builds credibility.
Strong Communication Strategy: Clear monetary policy communication is vital for guiding inflation expectations and market behaviour. Press releases, policy speeches, and forecasts are various ways to convey the stance of monetary policy at different times.
Operational Independence of the Central Bank: A successful IT framework depends on central bank independence, including the autonomy to set interest rates, a clear inflation mandate, and protection from political influence. Independent central banks are associated with lower and more stable inflation.

Following several innovations in the definition of money, the Inflation Targeting Framework provides a clearer path to price stability in Nigeria by anchoring expectations through explicit targets, supported by stronger institutions and transparent communication. The Central Bank of Nigeria will prioritise the price-based monetary policy tools, such as the Monetary Policy Rate (MPR), Open Market Operations and Standing Facilities Corridor to monitor and address price developments. The Bank's implementation of the framework will also align with global best practice through the use of forward guidance and macroprudential tools to enhance policy credibility and effectiveness.

The Bank’s phased approach to the transition will entail a preparatory phase, design and development phase, implementation, as well as a post-implementation phase.

Other Monetary Policy Reforms

In preparation for the transition to Inflation Targeting, the Central Bank of Nigeria has implemented a series of reforms and policy measures to achieve its broad monetary policy objectives. Since 2024, the key monetary policy reforms of the Bank include:

Roll-Back on Quasi-Fiscal Operations: The Bank instituted a gradual but deliberate pull-back from direct development financing and re-invigorated its focus on its core mandate of monetary and price stability through orthodox monetary policy. This is in line with the management’s commitment to stabilise the economy and foster sustainable growth.
Cessation of budget deficit financing beyond the statutory limit.
Monetary-Fiscal Policy Coordination: Monetary and fiscal policy co-ordination remains essential for long-term planning and sustained economic stability. The Bank also recognises the important and complementary role of fiscal policy in the successful implementation of the Inflation Targeting Framework. Accordingly, the Bank has continued to work closely with the fiscal authority, reflecting a unified commitment by both policy institutions to the objective of price stability.
More Effective Liquidity Management: The Bank continued to fine-tune its liquidity management tools to moderate money supply growth, ensure monetary policy effectiveness and ultimately moderate inflationary pressures.
Foreign Exchange Market Reforms: Reforms have been ongoing to drive the unification of multiple FX windows under a transparent willing buyer, willing seller system. To this end, the Bank introduced the FXCode and the Bloomberg B-Matching platform to improve transparency and price discovery. In addition, the Electronic Foreign Exchange Matching System (EFEMS) was implemented to ensure transparency, fair and efficient FX trading, to minimise counterparty risk and ensure compliance with CBN regulations. Verified FX backlogs were cleared, and a phased exit strategy implemented. The Bank has also overhauled the Bureau de Change framework, liberalised remittance operations, removed FX access restrictions on the “43 items”, and streamlined documentation for trade flows. Collectively, these reforms are restoring credibility, stability and deepening the FX market, to promote macroeconomic stability.
Monetary Policy Communication: The Bank has developed an all-inclusive strategy to strengthen the communication of its policy decisions. It seeks to enhance credibility & transparency, reduce uncertainties and build confidence in the Bank’s policies as well as maintain the integrity of monetary policy implementation. The new strategy includes a broad-based public engagement framework on monetary policy matters, which serves as a vehicle for regular engagements with stakeholders in the economy. In addition to conventional social media channels such as Facebook, Twitter, Instagram, and LinkedIn, the Bank has employed alternative platforms to engage more effectively with the public. To further ensure inclusivity and national reach, the strategy incorporates communication in Nigeria’s three major languages comprising Hausa, Yoruba, and Igbo as well as Pidgin English, thereby broadening access and fostering greater understanding of monetary policy across diverse communities.