Higher interest rates painful for borrowers but necessary to control inflation, says Cardoso

The Governor, Central Bank of Nigeria (CBN) Mr Olayemi Cardoso, has said the decision of the Monetary Policy Committee (MPC) to raise the Monetary Policy Rate (MPR) to 27.25 per cent was a bold move, stressing that higher interest rates though painful for borrowers, but is necessary to curb excess money in circulation and control inflation.

 While addressing members of the Harvard Club of Nigeria in Lagos at the weekend on the topic: “Leadership in Challenging Times: Restoring Credibility, Building Trust, and Containing Inflation”, Cardoso, said, “Leadership is about making hard choices to secure long-term stability over short-term comfort in moments like these.’’

He stated that the apex bank under him took the bold step of floating the Naira in the foreign exchange market to bring the official exchange rate closer to market reality.

About three CBN Governors before Cardoso had toyed with the floatation option when they faced constant excess demand for foreign exchange and exchange rate pressures. They all abandoned the option due to fear of massive depreciation of the value and the contagion effect across the macroeconomic space.

But Cardoso, speaking for the first time on his journey on the saddle so far and focusing on the turbulence in the financial market following his assumption of office a year ago, explained that the floatation policy was meant to address the disparity between the official and parallel rates which encouraged arbitrage and speculation, eroding trust in the market.

He recalled that upon assumption of duty, he understood that the credibility of the CBN had to be the bedrock of the actions he and his team took.

He stated: “Without credibility, no policy, however well-intentioned, can succeed. Floating the naira, a decision met with considerable public criticism, was necessary to bring the official exchange rate closer to market reality. ‘‘The disparity between the official and parallel rates had encouraged arbitrage and speculation, eroding trust in the market.

“Credibility is earned by consistency. The decision to close this gap, while painful in the short term, sent a message to market participants that the CBN was committed to transparency and sound monetary policy,” he added, noting that speculative trading had been reduced, and stability was gradually returning to the currency markets.

While noting that containing inflation remained the Bank’s core mission, he acknowledged that the CBN was yet to meet its target.

However, he stressed that recent declines reported by the National Bureau of Statistics (NBS) in July and August 2024 showed that the CBN was moving in the right direction.