The Central Bank of Nigeria (CBN) has reduced its benchmark rate by 350 basis points to 23%, a move aimed at realigning its policy rate with the market. This decision was made by the CBN's rate-setting committee, which also narrowed the corridor around its policy rate. The new rate at which banks can borrow from the central bank is 23.5%, while banks can park their surplus funds with the bank at 20.0%.
The CBN described this rate-cutting and decision to narrow the corridor as an operational recalibration, rather than an easing of domestic monetary policy conditions. Despite this, a lower monetary policy rate should allow the government to issue treasury bills and other domestic debt more cheaply. However, this does not change the weight of older debts, and debt conversion will not materially alter the burdensome nature of Nigeria's public debt on the government's finances.
The CBN's decision to lower its benchmark rate is broadly consistent with the direction of the consumer price index, which slowed in August. The headline inflation number was 15.39% year-over-year, while month-on-month inflation fell to 0.71%. The core gauge reached 13.29%, including a small monthly decline. However, strong arguments remain against complacent policy making, as food inflation is currently at wallet-eroding highs, remaining above the headline print in August.
The CBN's move will depend on what happens to actual interbank, government securities, lending, and foreign exchange market rates. If rates in this market were to fall because players believe the new policy rate is a loosening of monetary conditions, then the CBN's move becomes a de facto easing. The CBN evidently has its work cut out for it, and success will depend on credible implementation, particularly in strengthening the MPR as its main policy lever.
A number of economic indices make the CBN's goals more realistic, including a Q2 balance of payments surplus of $3.51 billion and gross external reserves of $55.25 billion. These numbers reduce the immediate risk that the CBN's frameworks reset upsets domestic inflation expectations. The economy is growing, with output growth in the second quarter of this year standing at 4.43%, and the most recent purchasing managers index speaks to expanding economic activity.
The CBN should continue to regularly publish clear operational indicators to show that it is indeed strengthening transmission without sacrificing monetary restraint. This includes publishing the Nigerian Overnight Financing Rate (NOFR), interbank rates, domestic liquidity conditions, lending rates, and expectations for inflation. The fiscal side of the economy's management also has a role to play in maintaining stable prices, particularly in areas such as food security, logistics, and targeted protection for vulnerable households.
The CBN's attempt at recalibrating its policy tools is a technical repair to the domestic monetary policy transmission mechanism. However, it would matter very much that the CBN continues to implement its policy framework effectively, without using monetary policy to signal looser conditions before the country is able to anchor inflation expectations, achieve food price moderation, and exchange rate stability.
Key points
- The Central Bank of Nigeria has reduced its benchmark rate to 23% as part of an operational recalibration of its monetary policy framework.
- The CBN aims to strengthen its monetary policy transmission mechanism without sacrificing monetary restraint.
- Nigeria's economy is growing, with output growth standing at 4.43% in the second quarter of this year.
