CBN May Further Tighten Monetary Policy

By Modupe Gbadeyanka

There are strong indications that the Central Bank of Nigeria (CBN) may likely further tighten its monetary policy in order not to worsen the gains so far achieved in the exchange rate of the Naira against the key foreign currencies at the foreign exchange market.

The Monetary Policy Committee (MPC) of the apex bank, after its meeting this week, expressed satisfaction with the gradual retreat in inflation, the relative stability in the Naira exchange rate across all segments of the foreign exchange market and the improved prospects of foreign investment inflow.

Against the risks to banking system liquidity of the envisaged fiscal injections during the remainder of the year, the committee contemplated the prospects of further tightening of monetary policy should the need arise.

However, it noted that further tightening would widen the income gap, depress aggregate consumption and adversely affect credit to the real sector of the economy.

The MPC expressed concerns that loosening the monetary policy would exacerbate inflationary pressures and worsen the gains so far achieved in the exchange rate of the naira.

The committee said it was convinced that loosening would further increase the negative real interest rate as the gap between the nominal interest rate and inflation widens.