Nigeria’s Central Bank Governor, Olayemi Cardoso, will stick to his guns on orthodox monetary policy and won’t budge even though the naira is under renewed pressure, marking a sharp contrast to his predecessor’s approach.
In an interview with the Financial Times, Cardoso indicated that interest rates would stay high for as long as necessary to tame inflation, saying the apex bank had moved decisively to an orthodox policy.
“Let’s face it, for a long period, the CBN did not embrace orthodox monetary policies,” Cardoso said.
“We want to go back to using an orthodox method, and it will take us to where we want to go,” Cardoso, who stressed the apex bank had been reoriented to focus on price and monetary stability, said.
Cardoso has won rare plaudits from investors after hiking rates by a combined 600 basis points this year, lifting the key lending rate to 24.75 per cent, in a bid to narrow the negative real returns on naira assets.
The governor also allowed the naira to trade more freely at the official market and resumed dollar sales to BDCs. The reforms helped the naira to a remarkable run in March when it emerged as the best-performing currency globally.
The naira has since lost most of those gains and even ranked the worst-performing currency globally in April, according to Bloomberg data.
A dollar exchanged for as low as N1,515 on the streets Monday and opened at N1466 at the official market on the day, sliding from a peak of a little over N1,000.
Cardoso however said the situation is stabilising.
“Investors had previously had a tendency to head for the window in response to currency fluctuations,” Cardoso said. But now, there has been a “fundamental shift.” “They’re getting more comfortable with the market.”
He said that raising rates has been essential.
“Hiking interest rates has had a dampening effect on the foreign exchange market, so that has begun to moderate. It’s not a zero-sum game. You lose on one side, you gain on the other,” Cardoso said.
Markets have generally welcomed the CBN’s stance under Cardoso.
“The return to orthodoxy has been very much endorsed by investors,” said Razia Khan, chief economist at Standard Chartered Bank. “While Nigeria is not seeking an IMF programme it is implementing the kind of policies that would be endorsed by the IMF.”
The IMF said in its latest Nigeria report last week that the central bank had “unequivocally committed to price stability as its core mandate” and urged the bank to keep monetary policy tight to fight inflation and build the country’s external reserves.
Standard Bank in a recent report said that the CBN’s communication and transparency have improved significantly since the first MPC meeting in February.
“The CBN has been engaging investors and stakeholders on its actions and forward guidance regarding monetary policies,” the report said.
Standard Bank further noted that it expected the Monetary Policy Committee (MPC) to increase the MPR further, by 100 bps, when it meets on May 20, as inflation was likely to rise further in April and peak in May, based on the bank’s current estimates.
Cardoso told the Financial Times that there was every indication that the monetary policy committee he chairs would do whatever is necessary to keep soaring inflation in check.
“They will continue to do what has to be done to ensure that inflation comes down,” Cardoso said, ahead of the central bank’s meeting on May 20-21, where some analysts expect a further chunky rate hike.
Cardoso’s stance is in sharp contrast with his predecessor Godwin Emefiele, who oversaw an inflation crisis in Nigeria as the central bank regularly printed money to fund government deficits beyond the 5 per cent limit permitted by law.
Inflation in Nigeria remains stubbornly high at 33.2 per cent, the highest in three decades. Food inflation is higher still at 40 per cent, a sharp blow to the living standards of poorer citizens who devote a larger share of their income to staples, such as rice. Assaults on grain warehouses have been reported across the country.
Yet Cardoso’s policies do not receive universal domestic support, with businesses complaining about the high cost of credit even as foreign portfolio investors have gradually returned to the country.
Cardoso said he hoped that high rates would not “linger” for too long and act as a disincentive to investment and production.
Revamping the central bank is a key plank of President Bola Tinubu’s attempts to re-engineer Nigeria’s faltering economy, which lost its place in 2022 as the biggest on the continent thanks to sluggish growth and the weaker naira. Nigeria’s economy is now smaller than that of Egypt and South Africa. The IMF expects it to fall to fourth place behind Algeria this year.
Cardoso conceded that inflation was higher than he had hoped, blaming “distortions” mainly because of high food prices. “That obviously is something that is not directly within our control,” he said.
The central bank has not updated its inflation target of 6-9 per cent for more than a decade, but analysts expect this will be revised upwards.
