Agora Policy highlights ways CBN can tame rising inflation

Agora Policy, an Abuja-based think tank, has highlighted ways the Central Bank of Nigeria (CBN) can tame the country’s rising inflation.

The consumer price index (CPI), which measures the rate of change in prices of goods and services, rose to 22.41 percent in May, up from 22.22 percent in the previous month.

The think tank in its latest report on Monday said the CBN needs to recognise the scale of the inflation challenge and the importance of getting the situation under control.

“As long as inflation remains high, every other objective, be it the quest for exchange rate stability or the president’s agenda for increased cheap lending to MSMEs, will be much more difficult to achieve. The CBN needs to remember that its primary monetary policy objective is to keep inflation in check,” the report reads.

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“Given that inflation is currently much higher than ideal, the direction of monetary policy has to be to tighten or reduce the growth of money supply. This also means that interest rates will likely have to go up. How far up? At least to the point where “real” interest rates are no longer negative, but maybe even higher.

“These actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door.”

The report added that the many administrative measures have proved that the monetary policy rate has recently no longer influenced interest rates either for government securities or at the banks, “making the monetary policy committee effectively meaningless”.

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“The unwinding of the ad-hoc cash reserve ratio (CRR) policy, which means money refunded to banks, will also have unintended effects if not managed. The CBN will need to unwind most of these ad-hoc measures,” the think tank said.

According to the report, a better way forward would be to strengthen the monetary policy committee and place limits on CBN’s actions that fall beyond the scope of its regular actions.

“One option here would be to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies,” the report recommends.

Agora policy was founded by Waziri Adio, former executive secretary of the Nigeria Extractive Industries Transparency Initiative (NEITI).