- CBN governor, Olayemi Cardoso, says naira floating is necessary to close the gap between official and parallel forex market rates
- Cardoso also says interest rate hike is to contain inflation and curb excess cash in circulation
- He says the CBN will focus on its core mandate of ensuring price stability
Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, has said the floating of the naira was necessary to close the gap between the foreign exchange (forex) rates at the official and parallel markets.
Cardoso noted that though the decision was tough, it had to be taken to align the forex rate with market realities to halt arbitrage and speculation that undermined market trust.
He stated this at the weekend while addressing members of the Harvard Club of Nigeria in Lagos on the topic, ‘Leadership in Challenging Times: Restoring Credibility, Building Trust and Containing Inflation.’
Cardoso said, “Without credibility, no policy, however well-intentioned, can succeed. Floating the naira, despite public criticism, was necessary to bring the official exchange rate closer to market realities. The disparity between the official and parallel rates had fostered arbitrage and speculation, eroding trust in the market.”
‘Interest rate increase to control inflation, reduce excess liquidity’
The apex bank’s continued increase of interest rate, which was increased by 50 basis points (bps) to 27.25 per cent from 26.75 per cent in July at its 297th meeting held September 23 and 24, is to contain inflation and reduce excess cash in circulation.
Recall that the inflation rate soared to a new 28-year all-time high of 34.19 per cent in June. It, however, tapered in July after 19 months, declining to 33.40 per cent. The rate declined further for the second consecutive month in August to 32.15 per cent.
With the naira facing pressures that led to it losing 40 per cent of its value in the first half of 2024 alone, the CBN has made several efforts to contain the situation. One such measure is the curbing of excess money in circulation through mop-up exercises by the CBN.
The apex bank recently withdrew N1.335 trillion from circulation to curb the rapid expansion of money supply, referred to as M2, which reached N107.1 trillion in August 2024. The figure increased by 65 per cent year-on-year, increasing from N106.3 trillion in July and N101.34 trillion in June 2024.
Cardoso notes, “Our decision to raise the MPR to 27.25 per cent was bold. Higher interest rates, though challenging for borrowers, are necessary to reduce excess money in circulation and control inflation. Leadership is about making hard choices for long-term stability over short-term comfort.
“Leading through challenging times requires resisting the urge to pursue too many initiatives. The Central Bank must focus on its core mandate – price stability. It is easy to be distracted by various political and economic pressures, but as a leader, you must prioritise.
“Effective communication is as important as sound policy. Clear, open communication fosters trust. Transparency, whether in publishing Dutch Auction results or providing regular economic updates, has been our guiding principle. Trust is built on the belief that a central bank will take necessary actions for economic stability, even when those actions are uncomfortable or politically contentious.”
5 policies that defined Olayemi Cardoso’s one year in office
Meanwhile, TheRadar reported that Olayemi Cardoso recently marked one year of being the governor of the Central Bank of Nigeria (CBN).
The one-year period is characterised by five major policies, which include the bank recapitalisation exercise, clearing of the forex backlog and lifting of forex restriction on 43 items.
