Is MPR hike best option for Nigeria?

Nigeria's Central Bank of Nigeria (CBN) recently announced a larger than expected 100 basis point rate hike at its first monetary policy committee meeting, stirring controversy and debate among analysts and economists. Patrick Curran, Senior Economist at Tellimer, shared his insights on the matter during a recent CNBC Africa interview. Curran highlighted that the rate hike, while significant, may not be the sole solution to control inflation in Nigeria. One key point discussed during the interview was the symbolic nature of the rate hike. Curran pointed out that the policy rate in Nigeria has seen a disconnect from prevailing market rates over the past few years, making it more of a symbolic measure rather than an effective tool for monetary policy. He noted that mechanisms like the cash reserve ratio have a more direct impact on the central bank's policy stance. Another key takeaway from Curran's analysis was the controversy surrounding the CBN's monetization and lending programs. The central bank has been heavily involved in funding the government's budget deficit through ways and means advances, raising concerns about the impact on monetary policy transmission. Curran emphasized that the central bank's financing of the deficit has hindered its efforts to tighten policy effectively. The divergence between Treasury bill rates and the policy rate was also a focal point of the discussion. Curran mentioned that while the rates have shown convergence in the past, the current gap presents a challenge. He highlighted the uncertainty around how quickly the gap might close, expressing that aggressive liquidity mop-up efforts by the central bank could prompt a faster convergence. Looking ahead, Curran shared his hopes for a positive policy shift post-elections in Nigeria. He advocated for a move towards orthodox policymaking, particularly in terms of ending the monetization of the budget deficit and reforming exchange rate policies. He suggested that a new regime could bring about a liberalization of Nigeria's exchange rate and a shift towards a more conventional monetary policy framework. In conclusion, the interview shed light on the complexities facing Nigeria's central bank amidst the rate hike decision. While the move was aimed at narrowing the negative real interest rate margin, analysts like Curran stress the importance of addressing broader policy issues to ensure long-term stability and efficiency in the country's monetary system.