When Will All Things Ever Be Equal For CBN’s Monetary Policy To Work?

By Isaac Asabor

If there is one particular concept in the field of economicsthat uniquely distinguishes it from other bodies of knowledge, it is that of being involved in the study of cause and effect. For instance, by looking at therelationship between two different factors, economists can make precise predictions. The foregoing professional run-through is drawn from or inspired by the Latin term “Ceteris paribus” which is a concept used to help explain certain economic theories.

For the sake of clarity, “Ceteris paribus” is a Latin phrase that means "All other things being equal." Experts use it to explain the theory behind the laws of economics and nature. It means that something will occur as a result of something else most of the time if nothing else changes.

To further bring the foregoing into clarity, it is not an exaggeration to say that given the believability and trustwhich economists at the Central Bank of Nigeria (CBN) repose in the concept, particularly under the tenure of its present Governor, Mr. Godwin Ifeanyi Emefiele, that it is little wonder that Nigerians have for the umpteenth time been witnessing one monetary policy upon another been churned out from the apex bank in the bid to better Nigeria’s economy, and yet despite the challenges that necessitated the implementation of such policies, the challenges would still persist, and even get worse in some cases.

Given the foregoing, it is expedient in this context to make reference to the decision of the CBN’s Monetary Policy Committee (MPC) in May 2022, exactly a year ago, to raise the benchmark interest rate to 13 percent. It will be recalled that the governor of the CBN, Mr. Godwin Emefiele, during the period under reference in this context said the action was to tame the rising inflation rate in the country at the time.

At the time the governor of the apex bank together with other members of the MPC took the decision, theprevailing inflation rate stood at 16.8 percent in April, according to a report by the National Bureau of Statistics (NBS). The soaring rate was driven by fuel price increases and accelerating costs for food, including bread and cereals. It will also be recalled that the CBN attributed the global economic outlook which remained uncertain at the time amid rising commodity prices worsened by the Russia-Ukraine war as one of the reasons that spurred its decision.

As gathered, the interest rate is one of the key tools deployed by the central banks across the world to manage the flow of money and productivity in their respective countries given the fact that a change in the interest rate could have an effect on macroeconomics and other key economic indicators like consumer spending and borrowing.

In Nigeria, the tool allows the apex bank to effect changes in broad monetary policies designed to facilitate the government’s planned fiscal policy.

Ostensibly buttressing the reasons behind the raising of the interest rate to 13 percent at the time; exactly a year ago, the CBN governor argued that the sharp rise in inflation across both the advanced and emerging market economies generated growing concerns among central banks across the world, and added that the progressive rise in inflation driven by rising aggregate demands and wage growth at the time mounted sustainable pressure on price levels.

The governor at the time revealed that inflationary pressure which is the major determinant of the CBN’s hike in interest rate necessitated the need to tame rising inflation.

Emefiele while addressing the concern last year said, “On the need to tighten, MPC feels compelled that tightening would help moderate inflationary trade-off from the steady growth so far recorded and improve real GDP.

“It also feels that tightening would help rein inflation before it assumes the galloping frame considering the rising increase in headline inflation month-on-month.”

He explained that by hiking the interest rate to 13%, it is expected that borrowing would become more difficult and consumers would have less money to spend. By implication, amid lower demand among consumers, manufacturers of goods would be wary of raising prices. In effect, all of these would combine to reduce inflationary pressure.

But contrary to the confidence exuded by the governor at the time, not a few experts warned that the hike could also fail to tame inflation if other macroeconomic indicators go wrong. Simply put, “If all things refuse to become equal” as economists would always say.

Despite the decision taken by the MPC in 2022 under the leadership of the governor of the CBN, the leadership of the NBS recently, specifically less than two weeks ago, stated in its report that “The average 12-month annual inflation rate was 17.91 percent for the 12 months ending April 2023, this was 4.23 percent points higher than the 13.68 percent recorded in April 2022.”

The report stated that on a year-on-year basis in April 2023, the urban inflation rate was 23.39 percent, which was 6.05 percent higher compared to the 17.35 percentrecorded in April 2022.

As noted by the bureau, “This shows that the headline inflation rate (year-on-year basis) increased in April 2023 when compared to the same period in April 2022.”

Analyzing the forgoing statistical facts from the perspective of the concept of Ceteris Paribus which has continued to be a somewhat economic alibi, it is obvious that “All things were not equal”, hence the resiliency of the inflationary trend that kept growing since May last year when members of the MPC of the CBN unanimously took the decision to increase the interest rate to 13%. Given the foregoing, it is expedient to ask, “When Will All Things Ever Be Equal For CBN’s Monetary Policy To Work?” The question which is invariably the headline of this piece will continue to resonate as long as economic or monetary policy continues to fail upon implementation.

Thus, the question resonated on Wednesday after members of the MPC of the CBN announced that the Monetary Policy Rate (MPR) has been raised to 18.50percent from 18 percent to contain inflationary pressures.

The MPC also retained the asymmetric corridor at +100/- 700 basis points around the MPR, kept unchanged Cash Reserve Ratio (CRR) at 32.5 percent and liquidity ratio at 30 percent.

Given that the latest increase marks the third consecutive time the CBN will be raising the baseline interest rate this year, it is expedient to ask again as the CBN continues to strive in getting it right in the bid to lower the soaring inflation rate, “When Will All Things Ever Be Equal For CBN’s Monetary Policy To Work?”

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