CBN Holds Rates Steady: A Pragmatic Pause or Missed Opportunity?

The Central Bank of Nigeria (CBN) has decided to hold the Monetary Policy Rate (MPR) at 27%. It also tweaked the standing facility corridor and kept other key ratios unchanged. After a two-day meeting, CBN Governor Olayemi Cardoso emphasized the need to keep building on progress made toward taming inflation. But is this the right move for Nigeria’s economy right now?

There’s a case to be made for holding steady. Inflation, while still high, has been decelerating for seven months. This suggests the CBN’s previous tightening measures are starting to work. Add to that a more stable exchange rate, increased capital inflows, and a current account surplus. You can see why the MPC might favor a “wait and see” approach, letting past actions fully filter through the economy.

Yet, one wonders if this is a lost chance to provide some stimulus. Many anticipated the MPC would take heart from the recent dip in inflation and cut the base rate. That didn’t happen. Cardoso acknowledged inflation remains in the double digits. He stressed the need for sustained efforts. Still, is maintaining a hard line the best way forward when the economy is struggling to gain traction?

It’s worth noting that the CBN did adjust the standing facility corridor around the MPR. This effectively lowers the cost for banks to borrow from the CBN. Professor Uche Uwaleke sees this as “cautious operational easing.” He suggests banks now face lower funding costs. This should, theoretically, reduce interbank volatility and encourage lending to small and medium-sized enterprises (SMEs).

The big question is whether banks will actually lower their lending rates in response. Fiscal pressures, driven by deficit financing, complicate the inflation outlook. This necessitates a need to bolster economic expansion. The MPC’s decision looks reasonable when you factor in these considerations.

The CBN also revealed that gross external reserves have swelled to $46.70 billion. This marks a 9.19% jump since the end of September. That’s enough to cover over ten months of imports. That kind of buffer offers some comfort. It provides ammunition to defend the Naira and further stabilize prices.

Cardoso expressed satisfaction with the banking system’s resilience. Most financial soundness indicators remain within regulatory limits. Perhaps more significantly, he noted that 16 banks have met the revised capital requirements under the ongoing recapitalization program. This is a positive sign, suggesting the banking sector is strengthening.

He also addressed concerns that the macroeconomic progress hasn’t trickled down to average Nigerians. Cardoso argued that stability is key to attracting investment. He believes Nigerians will soon feel the positive impact of ongoing reforms. “Stability has a way of promoting growth and ensuring that it is stable and enduring growth,” he said. That’s the ideal. But patience is wearing thin.

On the topic of CBN interventions, Cardoso pointed out that a whopping N4.69 trillion remains outstanding from past initiatives. That’s 43% of the N10.93 trillion doled out since 2010. He stated that the CBN has reined back about N2 trillion since he took office. He further added that these outstanding interventions “tie our hands” in terms of launching new ones. Fair enough. Overzealous interventions can distort an economy. A more hands-off approach might be beneficial in the long run.

He believes the CBN’s convening power can encourage private sector participation. This can incentivize businesses to be more creative and innovative. It can lead to the creation of new products. He also brought up the issue of “moral hazard.” He emphasized that intervention funds should be repaid, not pocketed. A valid point that speaks to accountability.

It’s easy to criticize the CBN, but the reality is that managing Nigeria’s economy is an incredibly complex task. Global inflation is expected to decline but stay above pre-pandemic levels. Domestically, the CBN is trying to balance the need to curb inflation with the desire to stimulate growth. They must maintain the stability of the financial system.

The CBN insists Naira’s stability is now driven by market forces of demand and supply. This is a welcome departure from past practices. Cardoso stated that the FX system is open and transparent, with daily market turnover averaging half a billion dollars. If this is indeed the case, it inspires confidence.

The MPC forecasts sustained disinflation, driven by past policy tightening. It hopes the seasonal harvest cycle will boost food supply and moderate prices. These are optimistic projections. We’ll need to wait and see if they materialize.

The CBN’s decision to hold rates is understandable, given the circumstances. It reflects a cautious approach, prioritizing stability. It remains to be observed whether this pause will truly set the stage for sustainable, inclusive growth, or whether a bolder move was needed to jumpstart the economy. Time will tell.

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Keywords: CBN interest rates, Nigeria inflation, Naira stability, CBN monetary policy, Nigeria economy, CBN recapitalization, SME lending, external reserves