Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, at the Monetary Policy Committee (MPC) meeting held last week suggested that the committee’s attention is likely to shift to aggressive inflation containment if economic growth reading in the first quarter (Q1) of 2021 becomes relatively robust, and the price pressures accentuate.
While timely information on economic growth, jobs, consumer spending and inflation is always crucial to monetary policy making, the CBN had turned a blind eye in the recent past to signs of rising consumer prices.
For more than a year (since mid-2019) the CBN under Emefiele’s leadership had ignored rising inflation expectations, preferring instead to stimulate the sluggish Nigerian economy with a low interest rate environment it engineered, as well as direct interventions in various sectors of the economy that at last count had cost an upwards of N2 trillion.
The MPC which dubbed Nigeria’s recent GDP reading a “crawl out of recession”, requiring sustained monetary and fiscal supports to mature into relatively substantial growth, however noted that more aggressive monetary policy loosening is likely to inadvertently result in excess liquidity, which could worsen dollar demand pressures and cascade to further naira depreciation.
In other words, the CBN is bumping up against the limits of monetary stimulus, which has led to GDP growth of barely 0.11 percent in Q4, 2020, while having to worry about inflation touching multi-year highs of 17.3 percent in January.
So the CBN would now just rather let the data guide its actions which is a move towards more orthodox approach to monetary policy.
With favorable base effects of Q1 2020 (1.87%), and Q2 2020 (-6.1%) GDP readings to compare against, we feel at MoneyCentral that the apex bank may be more inclined to allow the domestic interest rate environment to reflect macro realities in the coming months.
There is also the little problem of the Naira’s unattractive carry relative to peer nations of similar credit ratings, and liquidity concerns as real rates remain negative.
The CBN’s moves towards data dependency is a reality check as a faster growing economy, which triggers rising demand for foreign exchange, would need higher interest rates to attract portfolio flows and begin to move towards price stability.