Cardoso explains reasons behind MPC interest rate cut, hails synergy with fiscal authorities

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Olayemi Cardoso, the governor of the Central Bank of Nigeria, on Thursday, provided insights into the reasons behind the Monetary Policy Committee’s recent interest rate cut.

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Mr Cardoso, who spoke on a panel at the ongoing World Bank/IMF meetings in Bangkok, Thailand, also lauded the fiscal authorities for providing synergy in ways that ensured smooth transmission and communication of policy decisions.

In a move that surprised market watchers and analysts, the Central Bank of Nigeria (CBN) cut the benchmark interest rate to 23 per cent in September.

This decision followed two consecutive retentions of the Monetary Policy Rate (MPR) at 26.5 per cent, after holding it in May and July and reducing it by 50 basis points in February from 27 per cent.

“It took the market by surprise and markets, as we know, generally don’t like surprises,” Mr Cardoso said at the panel discussion themed “How Central Banks Decide—Committee Decision-Making and Communication in an Era of Uncertainty”.

“I think the communications aspect was very, very well thought through.”

Reasons

The CBN governor explained that several things had happened before the decision was made, which further supported it.

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“For example, we had significantly changed a lot of the things that were not working… for example, coordination between the fiscal and the monetary.

“We had signed up an MOU between the fiscal and the monetary to ensure that we were all on the same page, and that was very well received.  We have a overnight rate, which gives more clarity to what the real rates are as opposed to a system that we had in place prior to that.”

On the macro front, Mr Cardoso said Nigeria was in a very good place.

“Our external reserves were the highest we had had in 18 years. Inflation was coming down consistently even though, internationally, in many places, it was going up; in our case, it was coming down. And growth was still going at a reasonable enough pace.”

The Central Bank governor said the situation provided clarity on the fact that Nigeria was in a relatively good place to do what the monetary authorities could have done earlier.

“And in doing that, which I must tell you, our communication channel after the MPC  is, we have a dialogue with the press.  And of course, in the process of the dialogue, I spent more time than normal in explaining where we were coming from and where we were.

“And it made it easier for them to understand why we took the decision. Because you could go the other way around and talk about the decision first, and then now leave people wondering,  ‘how does that relate to something else?’ And I had to go back and say, well, this is where we were coming from. These are the headwinds we’ve met. This is how we’ve conquered them. And this is where we are now. So we’re in a very good position to correct now an imbalance in our transmission mechanism that has been dying to be corrected.”

The governor also reiterated that the decision was supported by the external buffers and macro stability created.
“Whatever be the case, we have the buffers, we’re in a good place, the macros are looking well, that really there’s nothing for anybody to worry themselves about,” he said.

“It took the market by surprise, but by the time they digested the information, and they knew, especially the markets, the markets knew that there was a break in the transmission; they knew this because they operate in that market and obviously knew that the action we are taking makes sense.

“I will finish by saying that to do such a thing successfully, you must have an element of credibility with the markets. And when I say credibility with the markets, the markets must have consistently seen you over a period of time doing things in the right way and believe they can put their trust in you.”