In my reflections today, I discuss recent developments in the economy—as well as key monetary policy actions and conclude with my own views on the economic outlook.
Last month, in a move to address inflation, the Monetary Policy Committee (MPC), the group responsible for setting interest rates in the country, took significant steps by tightening monetary policy. This involved raising the benchmark interest rate by 200 basis points, from 22.75 percent to 24.75 percent. This is a welcome step, but recent inflation data suggests further monetary tightening might be needed to effectively control inflation. We can agree that progress in reducing inflation has been slower than anticipated, which of course continues to prompt a need for further action.
As we know, the objective of the Central Bank’s monetary policy is price stability, which, when operationalised, is focused on achieving a lower inflation rate. The bank’s target of 21.4 percent, in my view, is relatively high, but given the specifics of Nigeria’s current economic predicament, it is safe to say that the target appears modest.
At its current setting, the MPC’s efforts, while appropriately calibrated to reduce inflationary pressure, remain restrictive. In an earlier presentation, I argued for the importance of striking a moderate balance and highlighted the need to consider how future decisions aimed at tempering inflation might impact broader economic developments. I believe this interaction between short-term and long-term considerations should be at the heart of any effective monetary policy strategy.
A perennial challenge in monetary policy analysis is recognising the impact of a series of shocks on today’s inflationary and economic dynamics. These shocks have been driven by developments that directly influence the economy, such as price increases due to supply chain disruptions from the pandemic and widespread insecurity in food-producing regions. There have also been shocks resulting from pressures on monetary supply and exchange rates, including the repercussions of an ill-fated currency redesign, all of which significantly contribute to inflation overshooting above the target.
It follows, therefore, that these factors will indeed impact household income across the country, particularly affecting those with the lowest earnings. Naturally, there have been significant developments and considerable efforts by the central bank towards economic recovery. I welcome the governor’s reform efforts as part of ongoing measures to reduce unacceptably high inflation. Moreover, the bank’s initiatives to address imperfections in the FX market and stabilise the naira are already enhancing investor confidence and promoting investments in the productive economy.
While we have seen some positive progress, albeit bumpy at times, inflation remains well above the bank’s target. To be clear, reducing inflation is crucial for building an economy that works for everyone. However, the economic outlook remains uncertain, and it will likely take some time before we see the full effects of current policies.
I expect that additional rate increases will likely be necessary to align inflation with the bank’s target. Of course, tightening monetary policy will dampen demand, and there remains a continuing risk that high electricity tariffs and the introduction of a new cybersecurity levy could reverse some of the progress we have seen in recent months.
My perspective on the path forward is that, given the progress made so far, it would be useful to let incoming data from the economy guide future policy decisions. One of the challenges faced by the bank in the previous administration was its inability to achieve improved employment and manage stable prices. But beyond this, the bank lacked the substantial degree of independence needed to implement effective monetary policy.
The executive and legislature must grant the central bank a high degree of independence. This is crucial because the bank’s long-term focus on maximising economic outcomes and serving the public interest can be compromised by short-term political pressures. This implies that the bank’s tenure and mandate should not be subject to election cycles or viewed as a tool for winning or influencing elections. Historically, central banks with the greatest degree of independence have consistently delivered superior economic outcomes.
Separately, one direct action that the bank can adopt to cool inflation is to enhance its communication with the public regarding its activities. This includes regularly communicating its commitment and actions to reduce inflation. Such communication would help anchor inflation expectations, thereby encouraging belief among households and firms in the bank’s commitment to its targets. Routine surveys and consultation papers can then be used to monitor these expectations and ensure the bank’s message is resonating.
In turning to my baseline outlook for the year, given my thinking and the bank’s expectation of bringing price behaviour back to normal, I expect that the disinflationary trend will commence if the policy rate is held steady at its current level. However, I will remain closely attentive to developments and be prepared to adjust my outlook if conditions change.
King Omeihe is the President of the Academy for African Studies and serves as a Senior Economic Advisor at Marcel. He holds the position of Senior Lecturer at the University of the West of Scotland.
