Nigeria’s Central Bank to Enhance Monetary Policy with Inflation Targeting

Nigeria’s Central Bank has pledged to make significant changes to manage inflation, which reached a record high in October. The country’s economy, which is the largest in Africa, is seeking to overcome sluggish growth and become a $1 trillion economy. 

Governor Olayemi Carsodo announced on Friday that the Central Bank of Nigeria (CBN) will switch to inflation targeting instead of trying to control money supply as part of efforts to slow price increases.

“The CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy,’’ Governor of the CBN, Olayemi Cardoso, said at the 58th Annual dinner of the Chartered Institute of Bankers of Nigeria in Lagos. “Details and requirements for this framework are currently being finalised along with the fiscal authorities."

Inflation targeting was first introduced in the early 1990s by New Zealand’s central bank. Since then, many of the world’s central banks have adopted this approach, including the Bank of England, Bank of Canada, and the European Central Bank.

With inflation targeting, the central bank sets a specific inflation rate as its goal and adjusts monetary policy to achieve that rate. Done right, inflation targeting encourages people to make purchases sooner than later, which spurs the economy by making people buy things now before they cost more. Most central banks use an inflation target rate of 2% - 3%.

In Nigeria, Governor Olayemi Cardoso announced on Friday that the Central Bank of Nigeria will switch to inflation targeting to help curb excess liquidity in the banking system and tackle inflation, which has risen for 10 consecutive months, reaching 27.33% in October.

The Central Bank of Nigeria’s decision to switch to inflation targeting is expected to help the country’s economy to stabilize and grow. The governor has promised to tackle institutional deficiencies, restore corporate governance, strengthen regulation, and implement prudent policies to achieve this goal.

The governor also directed banks to increase their capital to support an expansion of the economy. He announced the CBN will soon reveal a new capital base for banks in the country to meet the need of a $1 trillion economy which the present government is aiming to achieve.

“It is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy,” he said. “Therefore, we must make difficult decisions regarding capital adequacy. As a first step, the central bank will be directing banks to increase their capital.”