The Central Bank of Nigeria has not done a good job of communicating its plans and strategies, putting its credibility in harm’s way, analysts at Capital Economics have said.
The London-based economic research firm recalled that CBN Governor Cardoso’s press remarks this week highlighted his continued ambition to restore confidence in and the credibility of the bank. “But so far an action that would help – a clear strategy to stabilise the naira and inflation – has been lacking,” it said.
It said Cardoso’s speech highlighted that the CBN would be taking a more “limited advisory role” in supporting government objectives and pulling back from direct fiscal interventions.
These remarks were described as a renewed attempt to draw a dividing line from former Governor Godwin Emefiele’s tenure, which saw deficit monetisation and unorthodox monetary policy.
“What has been surprising is the limited action so far on the latter. Inflation surged for a tenth successive month in October, and looks set to remain elevated. So far, the CBN appears focussed on using open market operations and other liquidity measures to raise market interest rates and thus bring inflation under control,” Capital Economics said. “But communication on this approach has been limited and poor. And we think this alone will not be enough to bring down inflation quickly.”
At the same time the naira appears out of control, with the official rate has traded with a wide 800-1100/$ band over recent weeks, periodically hitting new historic lows, it said.
The firm said that while planned foreign exchange inflows amounting to $10 billion were announced weeks ago, details have been elusive.
“With this backdrop, the stakes for the upcoming MPC meeting this Tuesday are high. Bear in mind that this meeting is well overdue, coming four months after the last one. We think the CBN will need to hike rates by at least 300bp to 21.75 percent. If not, the CBN’s credibility is likely to take another hit,” it added.