Inflation: CBN’s MPC faces fresh task as over 90.5% of naira circulates outside banks

As Nigeria prepares for the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting on Tuesday, fresh concerns have emerged over the continued ineffectiveness of traditional monetary tools.

The  MPC will  likely maintain its key rate at 27.5per cent for a second successive meeting to temper price pressures.

Inflation at 23.7per cent remains elevated and strains on the naira have only recently abated after an initial selloff in April caused by a slump in the price of oil, its main export.

While inflationary pressures have shown signs of deceleration in recent months, the staggering volume of currency held outside the banking system—currently estimated at over 90.5 percent—poses a critical hurdle to the MPC’s efforts to stabilize prices and ensure monetary policy transmission.

According to the CBN’s most recent data, Nigeria’s total currency in circulation climbed to N5.24 trillion as of January 2025, marking a sharp 43.4 percent increase from N3.65 trillion recorded in January 2024.

Alarmingly, N4.74 trillion—representing 90.5 percent of the total—is held outside the formal banking sector, indicating that the vast majority of physical cash remains beyond the reach of monetary regulators.

Economists warn that such a high level of currency outside the banking system undermines the effectiveness of monetary policy, especially tools like interest rate adjustments and open market operations.

 “When such a large portion of liquidity is beyond the central bank’s direct influence, monetary tightening or easing has a much weaker effect on real sector outcomes,” said Dr. Emeka Ajayi, an Abuja-based economist.

At its last meeting in February, the MPC opted to maintain the Monetary Policy Rate (MPR), citing the need for caution amid global uncertainties. However, with inflation still elevated and the structural challenge of cash dominance worsening, analysts anticipate a more hawkish stance in the upcoming May meeting.