Tighten monetary policy and increase lending rate to combat inflation, IMF advises CBN

The International Monetary Fund (IMF) has suggested in its recent report that the Central Bank of Nigeria (CBN) should tighten monetary policy by utilizing short-term instruments like Open Market Operations (OMO) or buy-backs to reduce excess liquidity in the economy and combat inflation. The IMF also advised increasing the monetary policy rate at the upcoming Monetary Policy Committee (MPC) meeting.

These recommendations were based on the significant increase in currency in circulation by N890 billion (32%) within the first three months of the CBN’s leadership, reaching N3.65 trillion. To address this, the CBN announced a N1 trillion treasury bill offer, which was oversubscribed to N2.3 trillion, with interest rates ranging from 13% to 29.9%.

The oversubscription indicates that raising the monetary policy rate could potentially help in controlling the money supply growth and lowering inflation. However, it is crucial to consider the potential impact of increased interest rates on borrowing and production costs. The optimal level of interest rate hike that balances economic stability and inflation control remains a key question for the MPC members to address.