Middle East War: What CBN’s Forex Gains Of Test for Nigeria’s Monetary Stability

By Raheem Ibrahim

The on going war between Iran and USA-Isreal has started to yield positive results on nation’s economy as the Central Bank of Nigeria’s (CBN) Monetary Policy Committee on its 304th policy meeting held on Wednesday, the 25th February, cut the rate of forex trading by 50 basis points to 26.5 percent from 27 percent.

The decision has been widely described as a cautious transition from prolonged tightening to calibrated easing, which the CBN stated that the decision followed 11 consecutive months of disinflation.

The economy witnessed headline inflation easing to 15.10 percent in January 2026, and food inflation falling sharply to 8.89 percent.

Foreign reserves are climbing to $50.45 billion, their highest level in 13 years, while the Purchasing Managers’ Index is holding at an expansionary 55.7 points as reported in the paper, no doubt that the macroeconomic narrative appears encouraging.

On a closer scrutiny, the sustainability of these gains is now being tested by forces far beyond the apex bank’s policy corridors. This is as a result of the clear, direct ripple effect of the escalating conflict between Iran and Israel, with direct military involvement from the United States, has triggered one of the most significant geopolitical energy shocks in decades.

For Nigeria, the timing is delicate. Just as the CBN signals confidence in disinflation and stability, global volatility threatens to complicate and possibly distort its monetary path.The rate cut, though welcomed by many analysts, must be understood in context.

Nigeria remains in an exceptionally high-rate environment. An MPR of 26.5 per cent is still restrictive by any standard. The Cash Reserve Ratio (CRR) remains elevated at 45 per cent for commercial banks, and this effectively sterilises nearly half of deposits, while liquidity ratios are tight, and lending rates to businesses often exceed 30 per cent once risk premiums are included. The adjustment is therefore incremental, not transformational.

The Director/CEO of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has repeatedly noted that Nigeria’s deeper challenge lies in weak monetary transmission.

According to him, even when the benchmark rate falls, structural rigidities, high CRR, elevated deposit costs, macroeconomic uncertainty, and crowding-out from government borrowing prevent meaningful relief from reaching manufacturers, SMEs, agriculture, and other productive sectors.

Monetary easing, without structural reform, risks becoming cosmetic. The point is that even before structural reforms take effect, the fact is that an external shock will first reshape the landscape.The Iran-Israel conflict and US involvement have reignited fears in global energy markets.

Joint U.S. and Israeli strikes on Iranian targets and retaliatory missile exchanges across the Gulf have unsettled oil traders. Brent crude, already rising in anticipation of escalation, surged toward $70-$75 per barrel and could climb higher if shipping through the Strait of Hormuz, through which nearly 20 per cent of global oil supplies pass, faces disruption.

It is still an irony that a major crude exporter is also an importer of refined petroleum products. Higher crude prices offer a theoretical windfall. For Nigeria’s economy, it is well known that oil remains its largest source of foreign exchange and accounts for roughly 50 per cent of government revenue.

The good thing is that rising prices could boost reserves, improve forex liquidity, strengthen the naira, and ease fiscal pressures. In theory, this external cushion could support macroeconomic stability and reinforce the CBN’s easing posture.

However, the upside is constrained by structural weaknesses. Nigeria’s oil production remains below optimal capacity. A significant portion of crude exports is tied to long-term contracts, limiting immediate gains from spot price surges. As SB Morgen observed in its analysis, Nigeria’s “windfall” is volatile and limited by soft production performance.

More critically, Nigeria’s dependence on imported refined products exposes it to imported inflation. Rising global crude prices increase the cost of petrol, diesel, jet fuel and gas. With fuel subsidies removed, these increases are passed directly to consumers and businesses.

Depot pump prices have already adjusted upward amid Middle East tensions. Energy costs are a primary driver of Nigeria’s inflation and this has remained sacrosanct. When fuel prices rise, transportation, logistics, food distribution, power generation, and manufacturing costs will definitely skyrocket, as well as the inflationary impulse spreads quickly through the economy.

This will push households to face higher food and transportation costs. Businesses see shrinking margins. Real incomes erode. Thus, the same oil shock that boosts government revenue may simultaneously reignite inflationary pressure, precisely at a moment when the CBN has begun cautiously easing policy.

This dynamic introduces a difficult policy dilemma, even as this could be for the fragile gains of the MPC. This is to say that if energy-driven inflation resurges, the CBN may be forced to pause or reverse its easing cycle. It is clearly spelled that high inflation typically compels tighter monetary conditions.

As Yusuf warned, geopolitical headwinds that elevate inflation often push central banks toward higher interest rates. A renewed tightening would strain credit conditions further, undermining growth prospects.There is also the risk of money supply expansion. Increased oil revenues, once monetised, can expand liquidity in the domestic system.

Historically, surges in oil receipts have been associated with monetary growth, inflationary pressure, and exchange rate volatility. Without sterilisation discipline, a revenue boost could ironically destabilise macro fundamentals.The exchange rate dimension compounds the complexity.

Heightened geopolitical risk, just as it is currently playing out with the Iran-Israel conflict, often triggers global flight to safety. This will eventually lure investors to retreat to U.S. Treasuries and gold. Emerging markets face capital outflows. If it happens that foreign portfolio investors withdraw from Nigeria’s fixed-income market in response to global uncertainty, pressure on the naira could intensify.

Already, the CBN has demonstrated sensitivity to exchange rate dynamics by intervening to prevent excessive naira appreciation. A sharp rate cut in the midst of global volatility could destabilise carry trades and spur dollar demand. What should be known is that the 50-bps reduction reflects not just domestic disinflation, but global risk management such as geopolitical tensions, oil prices, and foreign investor sentiment.

•Culled from Blaise analysis, a journalist and PR professional, from Lagos.