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By Chinwendu Obienyi
In recent years, the interaction between monetary and fiscal policies in the global space has changed decisively.
This is because before the COVID-19 pandemic, monetary policy faced the challenge of inflation being persistently below target, while being constrained by the effective lower bound.
It became widely acknowledged that accommodative monetary policy on its own may not be sufficient for inflation to return to target. At the effective lower bound and with inflation too low, monetary policy needed support from expansionary fiscal policy that would increase aggregate demand and thus inflation.
It was only with the onset of the pandemic that monetary and fiscal policies started to pull in the same direction, reinforcing each other. The combination of a strong fiscal response, at both national and European level, and a forceful monetary policy response proved highly successful in lifting the economy out of the deepest contraction since the Second World War and in preventing a downward spiral of prices.
But these large-scale policy interventions coincided with a broad shift in the macroeconomic environment. Persistent constraints on production meant that supply could not keep up with demand, putting upward pressure on underlying inflation. Russia’s invasion of Ukraine fueled price pressures further, pushing euro area inflation to double-digit levels in October.
In Nigeria, similar to global trends, inflation has been driven by a mix of demand- and supply-side pressures. Structural challenges, such as limited industrial capacity, dependence on imports for essential goods, and disruptions in supply chains, have exacerbated inflationary pressures. External factors like fluctuating global energy prices and exchange rate volatility further complicate the situation.
Data from the National Bureau of Statistics (NBS) revealed a 33.9% year-on-year (y/y) increase in consumer prices for October, marking the steepest rise in four months. This surge was driven by a strong month-on-month (m/m) inflation rate print of 2.6%, a 7-month high, due to broad-based increases in food and core prices. In October, food prices rose by 2.9% m/m, surpassing the 12-month average of 2.8%, driven by farm and processed food inflation. This led to an annual food inflation rate of 39.2%, the highest in four months.
Despite calls to checkmate the hiking of interest rates in recent months by manufacturers as well as economists, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to increase the Monetary Policy Rate (MPR) by 25 basis points (bps) to 27.50% (Previous: 27.25%) at the November meeting (last meeting of the year). The hike marks the sixth consecutive rate hike this year, bringing the total rate increase to 875 bps as against 225 bps recorded in 2023.
Historically, the CBN has relied heavily on monetary policy tools, such as adjusting the monetary policy rate (MPR), to control inflation. However, the effectiveness of these tools is often limited by structural issues and the need for complementary fiscal measures. For example, high government spending, often driven by subsidies or social interventions, can counteract the CBN’s tightening efforts, leading to mixed policy outcomes. This has led to calls for fiscal reforms to align with monetary policy goals. According to analysts who gave their opinions after the meeting last Tuesday, initiatives to reduce fiscal deficits, improving revenue collection, and rationalizing public expenditure are steps in the right direction.
They also noted that these efforts must be sustained and reinforced by targeted measures to address the structural bottlenecks that drive inflation, such as investing in infrastructure, enhancing agricultural productivity, and supporting local industries.
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CBN’s position
At the recent Bankers’ Committee Dinner organized by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos at the weekend, the CBN Governor, Olayemi Cardoso, reinforces the central bank’s focus on price stability, viewing the 875bps hike as a necessary measure to curb inflation.
He signals cautious optimism about inflation’s future trajectory, underscoring that monetary policy effects are delayed but eventually impactful. “To borrow from Winston Churchill’s famous perspective: in our world, interest rates are undoubtedly the least desirable tool for combating inflation—except for all the others. I fully recognize the challenges that higher interest rates impose on businesses and families. However, these measures are not intended to be permanent.
We are closely monitoring the data, and as inflation shows sustained signs of improvement—something we expect in the near future—we will adjust rates accordingly”, Cardoso said.
Emphasizing flexibility, Cardoso said, “We expect a downward trend in 2025. Inflation remains unacceptably high, but the signs are encouraging, particularly given that the full effects of monetary policy typically take 6-9 months to impact the consumer sector”.
Analysts’ views
Afrinvest in its monthly report emphasized that while the recent hike in the Monetary Policy Rate (MPR) aligns with expectations, addressing inflationary pressures will require more than monetary tightening.
“Although the magnitude of the latest increase in the MPR (25bps) aligned with our forecast, the recent unfavourable trajectory of inflation rate and continued pressure on the FX re-affirmed our year beginning prognosis that only concerted monetary and fiscal policies targeted at both structural and public sector inefficiencies would deliver lasting relief from price pressure scourge”, It said.
Echoing the same sentiment, analysts at Cordros Research, said they expect a further 25bps hike in January 2025 due to expected inflationary pressures from elevated fuel prices, poor food harvests, and festive demand.
This reflects a proactive stance, signaling ongoing vigilance against inflation despite potential growth trade-offs.
Providing a balanced outlook, Cowry Research in its weekly report, noted that while tightening may continue in the short term, an accommodative approach could emerge as inflation moderates. “Collaborative efforts between fiscal and monetary authorities remain critical to achieving synchronised objectives of economic stability and sustainable development. The current approach signals cautious optimism, as the CBN navigates the complexities of inflation control, economic growth, and monetary transmission in the Nigerian economy”, the report said.
Conclusion
Nigeria’s approach to inflation control highlights the need for a balanced mix of monetary tightening and fiscal reforms. While short-term measures like interest rate hikes are necessary, long-term solutions depend on addressing structural challenges and aligning fiscal policies with monetary objectives. The cautious optimism from the CBN and analysts indicates potential improvement by 2025, provided collaborative efforts are sustained.
