The Central Bank of Nigeria (CBN) is expected to find it difficult to maintain a balance between its objective of managing inflation and the government's aim of reducing the cost of borrowing by the private sector to encourage investment in productive activities. As a result, while the CBN has recently increased its prime interest rate by 25 basis points, and while further rises are possible during 2011-12 as the central bank attempts to offset high government expenditure, they are unlikely to be of sufficient magnitude to bring inflation to single digits as desired by the CBN. The issue of boosting lending to the productive sectors is also complicated by the banking crisis of 2009 and the subsequent reform programme put in place by the CBN. Banks are proving reluctant to lend given the uncertainty in the sector. The government is attempting to push banks towards increasing loans in areas like agriculture, but as many lenders lack the capacity properly to assess risk in smaller businesses, little benefit is likely to arise from such a scheme. Overall lending interest rates are expected to come down only moderately during the forecast period as inflation remains stubbornly high.

One matter that may affect monetary policy over the early part of the forecast period is the relationship between the current CBN governor, Lamido Sanusi, and the next president following the 2011 elections. As an appointment of Mr Yar'Adua, Mr Sanusi now has less support in the upper echelons of government and a move to replace him cannot be ruled out. However, he would probably be replaced by another technocrat, following the trend of recent appointments at the CBN, and so monetary policy would not be expected to suffer overall.