CBN’s 350bps Rate Cut Took Market By Surprise, Cardoso, IMF

BANGKOK, THAILAND: The market’s response to the Central Bank of Nigeria’s (CBN) 350 basis points interest rate cut has been seen as a sign of renewed confidence in the country’s monetary system, the International Monetary Fund’s (IMF) first deputy managing director, Dan Katz, has said.

Speaking with the CBN Governor Olayemi Cardoso at a panel session on “How Central Banks Decide: Committee Decision Making and Communication in an Era of Uncertainty” at the ongoing International Monetary Fund (IMF) and World Bank meetings in Bangkok, Thailand, Katz said the market’s response to the Monetary Policy Committee’s (MPC) latest decision demonstrated the clarity and credibility the apex bank had built through its communication with market participants.

“I think the market’s digestion of the most recent decision is a testament to the degree of clarity and credibility you’ve built up in your communications,” Katz stated. The MPC, at its September meeting, reduced the Monetary Policy Rate (MPR) from 26.5 per cent to 23 per cent, a 350 basis points cut that took market participants by surprise but was absorbed without any disruption to market functioning.

Cardoso while acknowledging that the decision caught the market off guard, noting that investors generally do not welcome unexpected policy changes. However, he said the CBN’s communication strategy and the improvements recorded in key macroeconomic indicators helped market participants understand the rationale behind the decision.

“It took the market by surprise, and markets, as we know, generally don’t like surprises,” the CBN governor said as he attributed the market’s response to measures taken to improve coordination between fiscal and monetary authorities, greater transparency in interest rate determination and improvements in the country’s external and domestic economic conditions.

“For example, we had significantly changed a lot of the things that were not working, particularly around coordination between fiscal and monetary policy. We had signed an MOU between the fiscal and monetary authorities to ensure that we were all on the same page, and that was very well received,” Cardoso said.

He also pointed to the introduction of an overnight financing rate, which he said provided greater clarity on actual interest rates in the financial system.

On the broader economy, the CBN governor said Nigeria’s external reserves had reached their highest level in 18 years, while inflation was consistently declining and economic growth continued at a reasonable pace.

“Our external reserves were at their highest level in 18 years. Inflation was consistently coming down, despite rising in many parts of the world. Growth was also continuing at a reasonable pace,” he said.

According to Cardoso, these developments provided the monetary authorities with sufficient buffers to adjust the policy rate and address what he described as a faulty monetary policy transmission mechanism.

“All these factors created a situation in which we felt we were in a relatively good position to do something we could have done earlier,” he said.

The governor explained that, rather than announcing the rate cut without sufficient context, he devoted more time than usual to explaining the economic developments and policy considerations behind the decision during his post-MPC engagement with journalists.

“The decision took the market by surprise, but by the time market participants had digested the information, they understood the rationale. The markets knew there was a break in the transmission mechanism. They knew we were still operating that market, and they also knew that the action we were taking made sense”, he said.