CBN policies to bring down inflation rate are not working

The latest inflation rate data of 21.8% suggests that the Central Bank of Nigeria’s policies aimed at reining inflation are not working. The National Bureau of Statistics released its inflation report for January 2023, indicating that the inflation rate rose to 21.82%. It is the highest rate since March 2017 and the fifth consecutive monthly increase.

The latest inflation numbers cast a shadow on several central bank policies, some of which are controversial, that have been in place to bring down inflation. One of such policy is the monetary policy rate, MPR, which the Central Bank has increased by over 600 basis points from 11.% last year to 17.5% in January this year.

To curb the exacerbated rise in money supply, the apex bank has also implemented policies such as the Cash Reserve Ratio (CRR) for banks, which requires them to hold a percentage of their deposits with the CBN. This measure is aimed at reducing the amount of money in circulation and curbing inflation.

The Central Bank of Nigeria (CBN) recently announced the end of regulatory forbearance for banks, which had been put in place to provide relief for banks and borrowers impacted by the COVID-19 pandemic. The end of regulatory forbearance means that banks will now have to resume full compliance with regulatory and prudential requirements. This move is expected to increase the cost of borrowing for banks and individuals, as banks may be more cautious in lending.

However, the policies appear to have had limited impact, with inflation remaining stubbornly high. The situation is worsened by other factors that are mostly outside of the Central Bank’s control.

For example, insecurity remains a major challenge across the country and has added to logistics and distribution challenges affecting the cost of goods and services. The Nigerian government also continues to face a fiscal crisis as oil exports fall short of revenue expectations. The impact is felt directly on Nigeria’s forex reserve and by extension its ability to maintain exchange rate stability.

The CBN’s intervention policies, which aimed at stimulating small businesses and the industrial sector, were also tapered last year, meaning most businesses now lack the financial support they have been getting from the Central Bank amidst a credit crunch. This is a setback for an economy that desperately needs investment and growth.

In other countries, tightening monetary policy has been successful in reducing inflation. For example, the US Federal Reserve has raised interest rates multiple times in the past few years to combat rising inflation, with the latest rate hike in December 2022 bringing the federal funds rate to 2.75%.

The US inflation cooled to 6.4% in January recording a smaller but significant decline. The inflation rate in the US was as high as 9.1% in June 2022. The inflation rate in Germany also slowed in January to 9.2% from a year earlier. The UK also recently announced its inflation rate fell to a 5-month low in January to 10.1%. neighboring Ghana also announced a slower inflation rate for January.

In the meantime, the Central Bank continues its fight against inflation and will more likely double down on the hawkish monetary policy. The bank’s next monetary policy committee meeting is set for March 20th, 2023. Based on the CBN’s past actions, it is likely that the bank will continue to adopt a tight monetary policy stance to reduce inflation. This could involve increasing the monetary policy rate (MPR) and cash reserve ratio (CRR) further, which are measures the CBN has used in the past to control inflation.

However, it remains to be seen whether the Central Bank’s policies will succeed in reducing inflation. As things stand, the country is facing an uphill task in tackling inflation, which is likely to have far-reaching consequences for the economy and the lives of Nigerians.

The latest inflation rate figures are a wake-up call for the Nigerian government and the Central Bank to review and re-strategize their policies to tackle inflation. It is crucial to take a comprehensive view of the issues and work towards addressing them in a sustainable manner. The long-term economic stability of the country depends on it.

Nairametrics