Time was when the run-up to a meeting of the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee — MPC) generated its own buzz. Just after the Central Bank of Nigeria Act 2007 guaranteed the apex bank both administrative and legal autonomy, much of the conversation was about how its new institutions were going to help secure monetary and price stability in the face of congenitally profligate central governments.
Then there were the arguments over tools. Inflation targeting, was one example. Was this a tool useful for developed economies? Or could it also have resonance in an emerging economy like ours? If the answers to both these questions were in the affirmative, then what was the preferred inflation target?
Following from this was the related question around what tool(s) the CBN was going to use to address inflation?
Put differently, how best to tinker with the cost of money? To put it up if the domestic economy were heating up ― essentially because rising demand was driving up domestic prices? Or to reduce it as part of a process of boosting domestic demand in search of fillips for a flagging economy? The cash reserve requirement had a clear path from lowering the amount of loanable funds available to banks for every naira deposit raised, to reducing domestic demand.
But consensus was that this was too blunt an instrument, and not too easily used.
Still, then there was (and even now, there remains) little agreement over the relationship between the policy rate (the monetary policy rate — MPR) and retail bank rates. By how much did you have to raise the MPR, for example, to push bank lending rates up by 100 basis points? Together with the uncertainty over the length of time between CBN action on the MPR and when banks’ rates responded, this was the famous monetary transmission mechanism conundrum, which both the CBN and the IMF continued to promise a solution between 2003 and 2007.
We still await what work the apex bank has done on this.
Concerns were also once raised over the huge cost burdens to businesses (including banks) of our decrepit national infrastructure. If businesses each had to build their own infrastructure as a result of the national lack, we clearly, then are a high cost economy. Could we at the same time be a low interest rate economy?
Despite these drawbacks, three process aspects of the CBN’s newly-discovered autonomy were deemed market-friendly. First, was the relatively public appointment of members of the MPC, especially their senate confirmation hearings. Then there was the release as soon as each bi-monthly meeting of the rate-setting committee ended of a communique detailing the deliberations of the committee and the decisions reached thereon. This communication with the public was a settled part of the CBN’s process of anchoring the markets’ inflation expectations.
Once the MPC then opted to include delayed release of each members’ opinion as part of this process, the markets almost reached that stage where you could call the MPC’s policy options in the light of available data on the economy ahead of each meeting.
Financial markets able to price central bank policy options into their products are steadier than ones denied this luxury. Which is the current state of domestic markets.
Two new variables make the outlook murkier still. First is the flippancy with which current fiscal authorities weigh in on monetary policy issues. And then is the virulence of dissent within the MPC on preferred policy direction. The first speaks to a danger (to the economy) of the erosion of the CBN’s independence; and the second of a threat (to the central bank) of policy incoherence.
I am not sure which is the more immediate worry, or which is likelier to hurt the economy the most. But it is certain that all of these are behind the unusual lack of interest in the outcome of this week’s meeting of the MPC.