Analysts Want CBN To Target Inflation Rate As A Policy Anchor

Over the last 5-years, the Central Bank of Nigeria (CBN) maintained exchange rate stability as its policy anchor.

So far, this has been done at the expense of huge foreign exchange reserves, a relatively higher interest rate environment, and massive liquidity mop-up. While this has supported the stability of the local unit, the approach has kept inflation rate high, thereby failing to bolster high Gross Domestic Product (GDP) growth.
As Governor Godwin Emefiele heads into his 2nd term, we highlight the need for the Apex Bank to consider ‘inflation targeting’, a monetary policy regime which pursues a low, stable and predictable explicit inflation rate, as its policy anchor.
In contrast to ‘exchange rate stability’, inflation targeting has proven to reduce relative price variability, guide market expectation and promote long term growth.
While the model is popular in more advanced economies such as New Zealand, Canada, and the UK, experiences in developing countries such as Paraguay, Chile and most recently, Jamaica, tells that this strategy is increasingly a more effective policy anchor.
However, for monetary policy to deliver a low, stable and predictable inflation rate environment, Governor Emefiele must work with the fiscal authorities to reduce fiscal dominance by cutting down public debt to avoid crowding out the private sector.
The private sector must be empowered to diversify and boost their export earnings, as such, improve current account position.
Finally, the CBN must embrace a flexible FX regime to enhance its ability to respond to shocks.