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CBN may soon begin inflation targeting


By Yemi Kolapo


The Central Bank of Nigeria has reiterated its decision to shift from a regime of monetary targeting to inflation targeting to ensure price stability just as it blamed increasing lending rates on the country’s decaying infrastructure.


The Head Corporate Affairs, CBN, Mr. Festus Odoko, said the new policy, which was in response to the failure of past policies to effectively address inflation issues, would produce better results as it had worked in other countries.


Inflation targeting refers to a monetary policy where central banks try to keep inflation within predetermined ranged.


Prof. Christopher Orubu of the Delta State University, Abraka, while delivering a paper on “Inflation in Nigeria, Concept, measurement and control,” during the CBN’s 13th seminar for finance correspondents and business editors in Asaba, Delta State, said the country had tackled inflation through a combination of different policy strategies. For now, he said, monetary policy was the most important instrument.


The Director, Research Department, CBN, Mr. Charles Mordi, noted that the prevailing high lending rates could impact negatively on the economy, adding, however, that there was no way the banks could cover their overhead costs, buoyed by comatose infrastructure without passing on the cost to borrowers.


Represented by Mr. Sylvanus Ibeabuchi, also of the research department, Mordi explained that this could be likened to the situation where consumers were made to bear the brunt of increasing power generating costs to manufacturers.


He, however, said that banks could not totally be absolved of blame, adding that lending rates should be such that would foster growth and development.


He said it was not impossible that some banks could be trying to make more profit than necessary under the current situation, describing such scenario as bad for economic growth.


This could explain the reason why lending rates have not moved in tandem with adjustments of the Monetary Policy Rate (the rate at which the apex bank lends to commercial banks), which replaced the Minimum Rediscount Rate.


According to Mordi, the MRR was unable to tame rates effectively, adding that ensuing events revealed that it was not an effective anchor rate.


“Between 1999 and 2005, the Monetary Policy Committee adjusted the MRR in line with conditions. However, in the face of the deluge of liquidity overhang that persisted in the banking system over the years from excessive fiscal operations of preceding governments prior to 1999, the MRR was not effective as an anchor rate”, he said.


He, however, explained that the new MPR policy was targeted at short-term overnight interest rates in the money market.


It was initially fixed at 10 per cent with a corridor of six per cent, three per cent above the MPR for lending facility and three per cent below the MPR for deposit facility.


But under the new framework, according to the CBN, a strong incentive has been provided for participants to execute deals among themselves in the money market rather than make the CBN the first point of call. This is to effectively make the CBN perform its function as the lender of last resort by not allowing rates on deposits. - punchng




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