BANGKOK, Thailand: Central Bank of Nigeria Governor Olayemi Cardoso has explained that the apex bank’s latest monetary policy decision, which caught financial markets by surprise, was driven by the need to address weaknesses in the transmission of monetary policy and improvements in Nigeria’s broader economic conditions.
Cardoso spoke during a session titled “How Central Banks Decide” at the ongoing International Monetary Fund and World Bank Annual Meetings in Bangkok.
He said Nigeria’s external reserves had reached their highest level in 18 years, inflation was consistently declining and economic growth remained at a reasonable pace. These developments, he explained, created an opportunity for the Central Bank of Nigeria to correct existing weaknesses in how monetary policy decisions affect the wider economy.
Responding to a question from IMF First Deputy Managing Director Dan Katz about how the CBN managed to introduce a decision that surprised the market without triggering significant disruption, Cardoso acknowledged that the move had been unexpected.
He attributed the outcome partly to deliberate communication and reforms undertaken before the Monetary Policy Committee meeting.
The governor said improved coordination between fiscal and monetary authorities had strengthened the policy framework. He also cited a memorandum of understanding between both sides aimed at ensuring that their policies and actions were better aligned.
Cardoso further pointed to the introduction of the overnight financing rate, which he said offered greater clarity about prevailing interest rate conditions compared with the previous system.
He maintained that the combination of stronger external reserves, falling inflation and sustained economic growth provided the CBN with an opportunity to address problems that could have been tackled earlier.
Nigeria’s inflation cycle differs from other economies
Cardoso also explained why Nigeria must make monetary policy decisions based on its own economic realities rather than automatically follow the actions of other central banks.
He said Nigeria’s inflation trajectory differed from that of several other countries because major domestic policy changes, including foreign exchange harmonisation and the removal of petrol subsidies, occurred at a different stage of the global inflation cycle.
According to him, these reforms contributed to inflationary pressures in Nigeria at a time when some other economies were already easing their monetary policies.
The CBN governor said policymakers therefore had to evaluate domestic economic conditions independently, even while monitoring developments in major economies such as the United States.
He acknowledged that international monetary policy decisions were important reference points but stressed that Nigeria’s circumstances had to remain central to the Monetary Policy Committee’s deliberations.
How the Monetary Policy Committee operates
Explaining the committee’s decision-making process, Cardoso said independent thinking among members was essential to ensuring meaningful debate and preventing groupthink.
He disclosed that the CBN’s Monetary Policy Committee comprises 12 members, including seven internal and five external members.
According to him, external members provide independent perspectives that help challenge established assumptions and strengthen discussions around monetary policy.
He said the CBN deliberately sought independent-minded external members during the transition from currency-market instability towards economic stabilisation to improve the credibility of policy decisions.
Cardoso also explained that internal members were not expected to agree on a position with him before formal committee meetings.
He said members received relevant economic data in advance and were able to scrutinise the information, request clarification from the committee’s secretariat and conduct scenario analyses before deciding how to vote.
The governor added that effective leadership of the committee involved identifying areas of agreement before addressing differences, helping members avoid prolonged disagreements over less significant issues.
He also said he reviewed members’ published personal statements to understand their reasoning, including after voting had concluded.
CBN highlights role of communication and credibility
Cardoso said communication played a major role in helping market participants understand the reasoning behind the unexpected policy decision.
He explained that, after the Monetary Policy Committee meeting, he spent more time than usual speaking with journalists and outlining the economic developments that informed the decision.
According to him, explaining the challenges the country had faced, the reforms introduced and the progress recorded helped the public and financial markets better understand the CBN’s actions.
He added that market participants were already familiar with weaknesses in the monetary policy transmission mechanism because of their experience operating within the financial system.
Cardoso stressed that managing an unexpected decision without causing serious market disruption depended significantly on the credibility the central bank had built over time.
He maintained that markets were more likely to trust policy decisions when they had consistently observed the institution acting in a transparent and responsible manner.
CREDIT: VANGUARD
