Economy
Soaring inflation puts Central Banks on a difficult journey—IMF
international monetary Fund has said that Central banks in major economies expected as recently as a few months ago that they could tighten monetary policy very gradually. Inflation seemed to be driven by an unusual mix of supply shocks associated with the pandemic and later Russia’s invasion of Ukraine, and it was expected to decline rapidly once these pressures eased. Now, with inflation climbing to multi-decade highs and price pressures broadening to housing and other services, central banks recognise the need to move more urgently to avoid an unmooring of inflation expectations and damaging their credibility. Policymakers should heed the lessons of the past and be resolute to avoid potentially more painful and disruptive adjustments later. The Federal Reserve, Bank of Canada, and Bank of England have already raised interest rates markedly and have signaled they expect to continue with more sizable hikes this year. The European Central Bank recently lifted rates for the first time in more than a decade.
Central bank actions and communications about the likely path of policy have led to a significant rise in real (that is, inflation-adjusted) interest rates on government debt since the start of the year. While short-term real rates are still negative, the real rate forward curve in the United States—that is, the path of one-year-ahead real interest rates one to 10 years out implied by market prices—has risen across the curve to a range between 0.5 and 1 percent. This path is roughly consistent with a “neutral” real policy stance that allows output to expand around its potential rate. The Fed’s Summary of economic projections in mid-June suggested a real neutral rate of around 0.5 percent, and policymakers saw a 1.7 percent output expansion both this year and next, which is very close to estimates of potential. The real rate forward curve in the euro area, proxied by German bunds, has also shifted up, though remains deeply negative. That’s consistent with real rates converging only gradually to neutral.
The higher real interest rates on government bonds have spurred an even larger rise in borrowing costs for consumers and businesses, and contributed to sharp declines in equity prices globally. The modal view of both central banks and markets seems to be that this tightening of financial conditions will be enough to push inflation down to target levels relatively quickly.
To illustrate, market-based measures of inflation expectations point to a return of inflation to around 2 percent within the next two or three years for both the United States and Germany. Central bank forecasts, such as the Fed’s latest quarterly projections, point to a similar moderation in the rate of price increases, as do surveys of economists and investors. This seems to be a reasonable baseline for several reasons:
- The monetary and fiscal tightening in train should cool demand both for energy and non-energy goods, especially in interest-sensitive categories like consumer durables. This should cause goods prices to rise at a slower pace or even fall, and may also push energy prices lower in the absence of additional disruptions in commodity markets.
- Supply-side pressures should ease as the pandemic relaxes its grip and lockdowns and production disruptions become less frequent.
- Slower economic growth should eventually push down service-sector inflation and restrain wage growth.
However, the magnitude of the inflation surge has been a surprise to central banks and markets, and there remains substantial uncertainty about the outlook for inflation. It is possible that inflation comes down more quickly than central banks envision, especially if supply chain disruptions ease and global policy tightening results in fast declines in energy and goods prices. Even so, inflation risks appear strongly tilted to the upside. There is a substantial risk that high inflation becomes entrenched, and inflation expectations de-anchor. Inflation rates in services—for everything from housing rents to personal services—appear to be picking up from already elevated levels, and they are unlikely to come down quickly. These pressures may be reinforced by rapid nominal wage growth. In countries with strong labor markets, nominal wages could start rising rapidly, faster than what firms reasonably could absorb, with the associated increase in unit labor costs passed into prices. Such “second round effects” would translate into more persistent inflation and rising inflation expectations. Finally, a further intensification of geopolitical tensions that ignites a renewed surge in energy prices or compounds existing disruptions could also generate a longer period of high inflation.
While the market-based evidence on “average” inflation expectations discussed above may seem reassuring, markets appear to put significant odds on the possibility that inflation may run well above central bank targets over the next few years. Specifically, markets signal a high probability of inflation rates of over 3 percent persisting in coming years in the United States, euro area and the United Kingdom. Consumers and businesses have also become increasingly concerned about upside inflation risks in recent months. For the United States and Germany, household surveys show that people expect high inflation over the next year, and put considerable odds on the possibility that it runs well above target over the next five years. The costs of bringing down inflation may prove to be markedly higher if upside risks materialise and high inflation becomes entrenched. In that event, central banks will have to be more resolute and tighten more aggressively to cool the economy, and unemployment will likely have to rise significantly.
Amid signs of already poor liquidity, faster policy rate tightening may result in a further sharp decline in risk asset prices—affecting equities, credit, and emerging market assets. The tightening in financial conditions may well be disorderly, testing the resilience of the financial system and putting especially large strains on emerging markets. Public support for tight monetary policy, now strong with inflation running at multi-decade highs, may be undermined by mounting economic and employment costs. Even so, restoring price stability is of paramount importance, and is a necessary condition for sustained economic growth. A key lesson of the high inflation in the 1960s and 1970s was that moving too slowly to restrain it entails a much more costly subsequent tightening to re-anchor inflation expectations and restore policy credibility. It will be important for central banks to keep this experience firmly in their sights as they navigate the difficult road ahead.
The Arab Africa Trade Bridges (AATB) Program and the Federal Republic of Nigeria formalized a partnership with the signing of the AATB Membership Agreement, officially welcoming Nigeria as the Program’s newest member country. The signing ceremony took place in Abuja on the sidelines of the 5th AATB Board of Governors Meeting, hosted by the Federal Government of Nigeria.
The Membership Agreement was signed by Eng. Adeeb Y. Al Aama, the CEO of the International Islamic Trade Finance Corporation (ITFC) and AATB Program Secretary General, and H.E. Mr. Wale Edun, Minister of Finance and Coordinating Minister of the Economy, Federal Republic of Nigeria. The Agreement will provide a strategic and operational framework to support Nigeria’s efforts in trade competitiveness, promote export diversification, strengthen priority value chains, and advance capacity-building efforts in line with national development priorities. Areas of collaboration will include trade promotion, agribusiness modernization, SME development, businessmen missions, trade facilitation, logistics efficiency, and digital trade readiness.
The Honourable Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, called for deeper trade collaboration between African and Arab nations, stressing the importance of value-added Agribusiness and industrial partnerships for regional growth. Speaking in Abuja at the Agribusiness Matchmaking Forum ahead of the AATB Board of Governors Meeting, the Minister said the shifting global economy makes it essential for African and Arab nations to rely more on regional cooperation, investment and shared markets.
He highlighted projections showing Arab-Africa trade could grow by more than US$37 billion in the next three years and urged partners to prioritize value addition rather than raw commodity exports. He noted that Nigeria’s growing industrial base and upcoming National Single Window reforms will support efficiency, investment and private-sector expansion.
“This is a moment to turn opportunity into action”, he said. “By working together, we can build stronger value chains, create jobs and support prosperity across our regions”, Edun emphasized. “As African and Arab nations embark on this journey of deeper trade collaboration, the potential for growth and development is vast. With a shared vision and commitment to value-added partnerships, we can unlock new opportunities, drive economic growth, and create a brighter future for our people.”
Speaking during the event, Eng. Adeeb Y. Al Aama, Chief Executive Officer of ITFC and Secretary General of the AATB Program, stated: “We are pleased to welcome Nigeria to be part of the AATB Program. Nigeria stands as one of Africa’s most dynamic and resilient economies in Africa, with a rapidly expanding private sector and strong potential across agribusiness, energy, manufacturing, and digital industries. Through this Membership Agreement, we look forward to collaborating closely with Nigerian institutions to strengthen value chains, expand regional market access, enhance trade finance and investment opportunities, and support the country’s development priorities.”
The signing of this Agreement underscores AATB’s continued engagement with African countries and its evolving portfolio of programs supporting trade and investment. In recent years, AATB has worked on initiatives across agribusiness, textiles, logistics, digital trade, export readiness under the AfCFTA framework, and other regional initiatives such as the Common African Agro-Parks (CAAPs) Programme.
With Nigeria’s accession, the AATB Program extends it’s presence in the region and adds a key partner working toward advancing trade-led development and fostering inclusive economic growth.
Federal Executive Council (FEC) has approved the 2026–2028 Medium-Term Expenditure Framework (MTEF), a key fiscal document that outlines Nigeria’s revenue expectations, macroeconomic assumptions, and spending priorities for the next three years. The approval followed Wednesday’s FEC meeting presided over by President Bola Tinubu at the State House, Abuja. The Minister of Budget and Economic Planning, Senator Atiku Bagudu made this known after the meeting.
The Minister said the Federal Government is projecting a total revenue inflow of N34.33 trillion in 2026, including N4.98 trillion expected from government-owned enterprises. Bagudu said that the projected revenue is N6.55 trillion lower than earlier estimates, adding that federal allocations are expected to drop by about N9.4 trillion, representing a 16% decline compared to the 2025 budget.
He said that statutory transfers are expected to amount to about N3 trillion within the same fiscal year. On macroeconomic assumptions, FEC adopted an oil production benchmark of 2.6 million barrels per day (mbpd) for 2026, although a more conservative 1.8 mbpd will be used for budgeting purposes. An oil price benchmark of $64 per barrel and an exchange rate of N1,512 per dollar were also approved.
Bagudu said the exchange rate assumption reflects projections tied to economic and political developments ahead of the 2027 general elections. He said the exchange rate assumption took into account the fiscal outlook ahead of the 2027 general elections.
The minister said that all the parameters were based on macroeconomic analysis by the Budget Office and other relevant agencies. Bagudu said FEC also reviewed comments from cabinet members before approving the Medium-Term Fiscal Expenditure Ceiling (MFTEC), which sets expenditure limits. Earlier, the Senate approved the external borrowing plan of $21.5 billion presented by President Tinubu for consideration The loans, according to the Senate, were part of the MTEF and Fiscal Strategy Paper (FSP) for the 2025 budget.
The spot rate on Nigerian Treasury bills has been increased by 146 basis points by the Central Bank of Nigeria (CBN) following tight subscription levels at the main auction on Wednesday. The spot rate on Treasury bills with one-year maturity has now surpassed Nigeria’s 16.05% inflation by 145 basis points following a recent decision to keep the policy rate at 27%.
The Apex Bank came to the primary market with N700 billion Treasury bills offer size across standard tenors, including 91-day, 182-day and 364 day maturities. Details from the auction results showed that demand settled slightly above the total offers as investors began to seek higher returns on naira assets despite disinflation.
Total subscription came in at about N775 billion versus N700 billion offers floated at the main auction. The results showed rising appetite for duration as investors parked about 90% of their bids on Nigerian Treasury bills with 364 days maturity. The CBN opened N100 billion worth of 91 days bills for subscription, but the offer received underwhelming bids totalling N44.17 billion.
The CBN allotted N42.80 billion for the short-term instrument at the spot rate of 15.30%, the same as the previous auction. Total demand for 182 days Nigerian Treasury bills settled at N33.38 billion as against N150 billion that the authority pushed out for subscription. The CBN raised N30.36 billion from 182 days bills allotted to investors at the spot rate of 15.50%, the same as the previous auction.
Investors staked N697.29 billion on N450 billion in 364-day Treasury bills that was offered for subscription. The CBN raised N636.46 billion from the longest tenor at the spot rate of 17.50%, up from 16.04% at the previous auction.
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