The Governor of the Central Bank of Nigeria, Olayemi Cardoso, along with other members of the Monetary Policy Committee, believed that lowering or maintaining the benchmark interest rate during the last Monetary Policy Meeting in September would have been a premature decision.
In the personal statement of the MPC members published on the CBN website on Thursday, the CBN governor and some other members of the committee expressed concerns about a reversal in the inflationary trend, which had declined in the two months prior.
Recall that at the September meeting, the MPC raised the MPR by 50 basis points to 27.25 per cent from 26.75 per cent, retained the asymmetric corridor around the MPR at +500/-100 basis points, raised the cash reserve ratio of deposit money banks by 500 basis points to 50.00 per cent from 45.00 per cent and merchant banks by 200 basis points to 16 per cent from 14 per cent and retained the liquidity ratio at 30.00 per cent.
In his statement, Cardoso said, “There is a general sentiment that the Committee should hold or loosen policy rate in light of the observed decelerations in headline inflation and the perceived adverse effects of tight monetary policy on the economic recovery and general well-being of Nigerians.
“This, in my judgment, will be premature because in as much as the effects of previous hikes have been effective in altering the trajectory of inflation, the balance of risks indicates that these gains may be reversed if we do not maintain a tight stance to mitigate the tailwinds.”
He added that on the global scene, the emergence of a moderate to positive outlook and the broad expectation of a soft landing in advanced economies was transmitting to a lowering cycle of policy rates.
“Whilst this is encouraging for emerging economies from a capital flows perspective, it is important to note that the destination of capital is ultimately driven by real returns on investments. Consequently, we must continue with the ongoing reforms to position Nigeria ahead of other emerging market economies and take policy and administrative measures to deliver positive real interest rates in the near term.
“The Committee has maintained its commitment to monitor global and domestic economic developments and to ensure that policy actions are guided by available data and that inflation expectations are adequately anchored. Previous aggressive policy measures by the Monetary Policy Committee, where both the Monetary Policy Rate and Cash Reserve Requirement were raised, are yielding dividends. In addition, the counter-factual evidence suggests that inflation would have entered a galloping phase had we not taken these difficult policy measures,” he added.
The Deputy Governor of Financial System Stability of the CBN, Philip Ikeazor, said that while domestic inflationary pressure was reducing, it was not yet at a level where a hold or cut decision could be made.
Ikeazor stated, “Domestic inflationary pressure, especially food inflation, is gradually dissipating but has not reached the desired level to warrant an easing of the current tight monetary policy stance. Factors such as climate change, transition to optimal energy pricing, and exchange rate depreciation, though stable, continue to pose sufficient upside risks to low and stable prices.
“Therefore, in my view, it is too early to end the tightening cycle, given that the enduring path to the current moderation in inflation rate and stability in the naira exchange rate is yet to crystallise.”
Another member of the MPC, Murtala Sagagi, added, “The easing of inflation for the last two consecutive months was greeted with caution considering the prevailing dynamics that could easily reverse its trajectory.
“To preempt the likely occurrence of further shocks to the economy, the MPC unanimously decided to tighten further with the hope that stronger coordination with the fiscal side would help restore confidence and place the economy on the pedestal of sustainable, inclusive growth.”
Muhammad Abdullahi submitted, “The risks to inflation in Nigeria are well known; taming inflation, therefore, remains a top priority for the MPC. The policy rate needs to go higher given the inflation outlook and the need to ensure that inflation expectations remain well-anchored, which in turn supports the federal government’s broader economic growth objectives.
In this context, maintaining the bank’s tight monetary policy stance is critical to sustaining domestic price stability.”
On Wednesday, the International Monetary Fund, in its latest Global Financial Stability Report, noted that the naira was showing signs of stabilisation, due to the recent interest rate hikes and efforts by the Central Bank of Nigeria to address foreign exchange backlogs.
The report partly read, “Policy actions by local authorities have also resulted in positive developments; for example, in Nigeria, rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability.”