CBN seeks improved monetary policy transmission to boost output

Central Bank of Nigeria (CBN) has emphasised the need to strengthen the transmission mechanism of monetary policy to improve economic output.

Speaking after the 307th meeting of the Monetary Policy Committee (MPC), the Governor of the CBN, Mr Olayemi Cardoso, said the gap between the Monetary Policy Rate (MPR) and the interbank rate had weakened the effectiveness of monetary policy transmission.

Cardoso said the ongoing disinflation process was encouraging but stressed that the divergence between the MPR and prevailing interbank rates needed to be addressed to ensure that monetary policy decisions had the desired impact on the economy.

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“We are of the firm opinion that our transmission mechanism is not working as effectively as it should.

“The disinflation process is ongoing, and that is a very positive thing. However, between the Monetary Policy Rate (MPR) and the interbank rate, there is a gap,” he said.

According to him, market participants were aware of the disparity, stressing that the CBN needed to close the gap to strengthen the transmission of monetary policy.

“The rate at which the interbank is working is disconnected from the MPR, and there is a need to fix that because if you don’t fix that, your translation process and your transmission mechanism weaken.

“We know that what is important to us is for that transmission mechanism to work as effectively and efficiently as possible,” he stated.

Cardoso said the MPC had consequently decided to reset the MPR and recalibrate the policy corridor as part of an operational realignment aimed at strengthening monetary policy transmission and reinforcing the primacy of the MPR.

“The MPC emphasised that the recalibration of the corridor does not constitute a change in the current monetary policy stance, but rather an operational reset to enhance the effectiveness of monetary policy and support the transition to an inflation-targeting framework,” he said.

He explained that members of the committee were of the view that the prevailing macroeconomic environment remained supportive of the recalibration without undermining the ongoing disinflation process.

“In arriving at its decision, the Committee noted that the observed divergence between the MPR and the prevailing market rates had weakened the effectiveness of monetary policy transmission.

“Members noted that the Bank’s ongoing repair of the monetary policy implementation framework, including the adoption of NOFR as a transaction-based operational benchmark, has improved the transparency of money market operations,” Cardoso said.

The governor said the committee therefore considered a reset of the MPR and recalibration of the policy corridor appropriate to better align the monetary policy implementation framework with prevailing market realities.

“This would strengthen policy transmission and restore the MPR as the principal signal of monetary policy. Members emphasised that the recalibration represents an operational realignment of the framework and should not, in itself, be construed as a change in the underlying policy stance,” Cardoso stated.