Nigeria’s Central Bank economists said they’re using monetary policy instruments to manage inflation.
The recent NBS inflation rate demonstrates that the CBN has a major issue. Especially since merely raising interest rates is failing to combat.
The National Bureau of Statistics reported 22.2% inflation in April 2023, up from 22% in March. Since January 2004, this is the greatest inflation rate, and it’s the highest since 2009.
The central bank has raised interest rates to fight inflation. The bank boosted rates from 11.5% to 18%, a massive 650 basis point increase. Despite the risks, the unusual rate hike is meant to slow inflation.
Readers may recall that Nigeria’s central bank spearheaded the botched rollout of new Naira notes and attempted to decrease cash in circulation.
Despite headline interest rate hikes and cash-in-circulation reductions, Nigeria’s inflation remains high.
At this month’s monetary policy meeting, persistent inflation will primarily influence the central bank’s decision.
As the central bank’s economists prepare for the meeting, they must accept that unilaterally and endlessly raising interest rates is ineffective and recognise the limits of hiking rates to fight inflation.
Regrettably, the apex bank is now in a race against time, especially since fuel subsidy cuts could increase inflationary pressures.
The worrying inflation rate requires the Central Bank of Nigeria (CBN) to rethink its policy and take more decisive and comprehensive steps.
According to recent data, raising interest rates may not be enough to lower inflation. The CBN must go beyond interest rate adjustments to restrict economic liquidity and control excessive consumer demand.
Inflation’s core causes should be the CBN’s priority. Root causes include real estate and financial services.
Sector: real
Nigeria’s inflation is driven by food. Especially farm-to-table.
Even the Governor of the Central Bank knows that food inflation drives Nigeria’s inflation.
In particular, Farm-to-Table throughput. These Farm-to-table problems affect food production.
Farm crop output is limited by security, climatic change (flooding), and mechanisation.
Logistics to transport massive agricultural produce from farmers to food stores and to our tables. They include bulk transportation, storage, electricity for perishables, etc.
Inadequate infrastructure, distribution chain bottlenecks, and supply disruptions lead to rising prices, hence supply-side restrictions must be addressed.
The central bank should work with relevant government agencies to adopt policies encouraging investment in important industries, boosting productivity, and ensuring efficient delivery of goods and services.
By addressing these root causes, the CBN can reduce inflationary pressures.
Sector: Finance
The Central Bank of Nigeria (CBN) should use a variety of measures in its monetary policy framework to handle the growing money supply and inflation.
One such tactic is adjusting bank reserve requirements to hold a bigger percentage of deposits instead of lending them out.
Because it hurts bank profits, this tool is controversial. Commercial banks’ latest results imply they can still make more money despite the CBN’s CRR policy.
By increasing reserve requirements, the CBN can reduce the money supply and reduce inflationary pressures by limiting lending and expenditure.
This approach shows the CBN’s determination to stabilise the economy and emphasises the need for proactive inflation management.
The Central Bank of Nigeria (CBN) must tighten bank oversight and regulation to battle rising money supply and inflation.
Implementing measures to ensure responsible lending and prevent excessive credit is required.
The CBN can achieve this by implementing stricter lending criteria, risk management protocols, and capital adequacy requirements on banks.
The Central Bank of Nigeria (CBN) can use open market operations to control money supply and inflation (OMOs).
The CBN can buy government securities from banks and other financial institutions at rates that appeal to banks, institutional investors, and individual investors through OMOs. To control inflation, this strategy reduces money in circulation.
The Central Bank of Nigeria must move beyond incremental interest rate adjustments to tackle inflation.
Raising rates can help, but addressing inflation’s sources and supporting impacted areas is more important.
By acting decisively and fostering transparency, the CBN can better manage inflation and boost Nigeria’s economy.
