Why CBN will maintain status quo on monetary policy

By Chioma Obinagwam

As the Monetary Policy Committee (MPC) holds its first meetings of the year on the 25th and 26th of January 2021, there are strong indications that Nigeria’s monetary authority – the Central Bank of Nigeria (CBN) will leave all monetary parameters unchanged.

Confiance News gathered from a report by Cordros Research- a firm reputed for providing insightful commentary on the prevailing macroeconomic and financial market environment at the weekend.

“We expect the Committee to assess the developments in the domestic and external macroeconomic and financial markets since its last meeting in November and provide guidance on the path of monetary policy in 2021.

“Although rising inflationary pressures alongside fragilities in the balance of payments present a strong case for monetary tightening, we believe it is rather too early for such a stance given the need to support economic recovery,” it disclosed.

Confiance News recalls that there has been a steady rise in inflation rate from 11.24 percent since September (Q3) 2019 to 15.75 percent as at December (Q4) 2020.

Inflation, which according to Investopedia, is the decline of purchasing power of a given currency over time, has been largely attributed to part of the consequences of COVID-19 pandemic on the Nigerian economy.

Reacting further to the possible outcome of the meeting, Cordros Research argued that monetary policy tightening would contradict previous heterodox policies targeted towards improving the flow of credit to the real sector of the economy and prolong the recovery phase.

“Monetary policy tightening will also create severe financial market turbulence and amplify deficit financing pressures for the government. On a balance of factors, we believe the Committee will keep policy rates unchanged and affirm the use of unorthodox measures such as CRR debits, Loan-to-Deposit Ratio (LDR), and direct intervention in employment-stimulating sectors to influence macroeconomic outcomes and ultimately attain macroeconomic stability,” it continued.

 

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