Business
Cardoso: Why CBN took market by surprise on interest rate
By Babajide Komolafe, Economy Editor
BANGKOK, THAILAND: The Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, has explained why the apex bank’s latest monetary policy decision took the market by surprise, saying the need to correct a faulty monetary policy transmission mechanism, alongside improving macroeconomic conditions, informed the move.
Cardoso, who spoke during a session titled How Central Banks Decide at the ongoing International Monetary Fund (IMF) and World Bank Annual Meetings, said Nigeria’s external reserves had risen to their highest level in 18 years, inflation was declining consistently and economic growth remained at a reasonable pace, providing room for the CBN to address the imbalance.
Responding to a question from the IMF’s First Deputy Managing Director, Dan Katz, on how the CBN managed communication around a decision that surprised the market but appeared to generate little disruption, Cardoso said the outcome reflected deliberate communication and reforms undertaken before the decision.
“You are absolutely right. It took the market by surprise, and markets, as we know, generally don’t like surprises,” he said.
He explained that several developments had strengthened the policy framework before the MPC meeting, particularly improved coordination between fiscal and monetary authorities.
“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,” he said.
The CBN governor also cited the introduction of the overnight financing rate, which he said provided greater clarity about prevailing interest rate conditions compared with the previous system.
“In terms of the situation from the macros, Nigeria was in a very good place. Our external reserves were the highest we had had in 18 years,” Cardoso said.
He added that inflation was declining consistently, while economic growth continued at a reasonable pace, creating an opportunity to correct the weaknesses in monetary policy transmission.
“These all put together a situation where we felt that we were in a relatively good place to do something we could have done earlier,” he said.
Nigeria’s different inflation cycle
Cardoso also explained why Nigeria’s monetary policy decisions must reflect the country’s specific economic circumstances rather than simply follow the actions of other central banks.
He said Nigeria’s inflation experience differed from that of many economies because major domestic policy changes, particularly foreign exchange harmonisation and the removal of petrol subsidies, occurred at a different point in the global inflation cycle.
“Our inflation cycle was pretty much different from much of the rest of the world, because we did certain things like the foreign exchange harmonisation, the lifting of subsidies at a different time in the inflation cycle of most of the countries,” he said.
“So inflation now came at that when many others were easing,” he added.
According to Cardoso, this divergence requires the MPC to assess Nigeria’s economic conditions independently rather than mechanically follow policy decisions in advanced economies.
He acknowledged that MPC members naturally examine developments in other countries, including the United States, but said the CBN’s decisions must be guided by Nigeria’s own circumstances.
“What is the United States doing? And everybody is looking at these things for different reasons,” he said, adding that the institutional leader must ensure that deliberations remain focused on the issues relevant to Nigeria at the time.
How MPC operates
Explaining the committee’s decision-making process, Cardoso said the independence of members was essential to ensuring robust deliberations and preventing groupthink.
The CBN’s MPC comprises 12 members, seven internal and five external. According to him, the external members bring independent perspectives that strengthen debate and challenge established assumptions.
He said the CBN deliberately recruited independent-minded external members during the transition from currency crisis to economic stabilisation to strengthen the credibility of monetary policy decisions.
“By and large, they brought a completely different perspective from the perspective of those who are not just internal,” he said.
Cardoso added that internal members were not expected to reach conclusions with him before formal MPC meetings.
He said members received the relevant data in advance and could interrogate the information, seek clarification from the committee’s secretariat and conduct scenario analyses before arriving at their own positions.
“I don’t hold meetings with internals and come to a conclusion on the MPC meetings before we go there. I don’t do that,” he said.
The governor also explained that effective chairmanship required identifying areas of agreement before tackling disagreements, thereby preventing deliberations from becoming trapped in arguments over relatively minor issues.
He said he also studied members’ published personal statements to understand their reasoning, even after votes had been taken.
Communication and credibility
Cardoso said the CBN’s communication strategy was critical to helping market participants understand the rationale for the unexpected decision.
He explained that, following the MPC meeting, he spent more time than usual engaging journalists and explaining the economic developments that had led to the decision.
Rather than simply announcing the policy action, he said, it was important to explain the challenges the economy had faced, the reforms implemented and the progress achieved.
“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,” he said.
He added that market participants already understood the weaknesses in monetary policy transmission from their experience in the financial markets.
“They knew this because they operate in that market, and obviously knew that the action we are taking makes sense,” he said.
Cardoso stressed that the successful management of an unexpected decision depended on the credibility the CBN had established over time.
“To do such a thing successfully, you must have an element of credibility with the market,” he said.
“The market 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,” he added.
