In Cardoso’s speech on Friday- beyond the obvious big elephant( recapitalization) another thing that caught my attention was the adoption of “Explicit inflation targeting”. CBN is telling us that they will go at their own pace to bring down inflation and emphasis will be on “Core inflation” rather than “Headline inflation or inflationary shocks”.
Core inflation refers to all commodities, services, and goods in the economy excluding food and fuel. Headline inflation, on the other hand, includes these, too, and refers to all the changes in the values of things.
We know targeting inflation in the sticky price sector leads to macroeconomic stability and welfare maximization. Why? Because Targeting core inflation is equivalent to stabilizing the aggregate output gap as output and inflation move in the same direction under complete markets.
If there is one thing the speech revealed, it’s that for the past 2 months, there has been a lot of work going on behind the scenes with recourse to data.
I have argued that except for the “macroeconomic esthetics”, high inflation numbers do not decide the growth rate in emerging countries like Nigeria. The major drivers of economic growth for Nigeria is FDI, Naira stability, and balance of payment/ balanced budget.
We see Cardoso is favoring inflation stability over inflation volatility.
Cardoso also understands that our inflation is more fiscal(productivity) than monetary. So the question then is, after attaining the required level of liquidity, while waiting on the fiscal side( which is never short term), does it still make sense to keep the interest rate up (under a stable inflation) ?. The jury is out on this one.
Finally, we see that Cardoso is following the path of Banco de Mexico (Central Bank of Mexico) and how they survived the financial crisis of 1995. Mexico and Nigeria belong to the MINT economy, so it makes better sense.
The target inflation took them 10 years to bring down inflation from 50% in 1995 to 3% in 2005. Will Nigerians wait this long?. Time will tell.
I was also surprised not to see intellectual or engaging commentaries on the speech. I got on Twitter to see people are more interested in Israel DMW story, It Says a lot.
Anyways, if you want to be ahead of Cardoso, go read up on Mexico financial crisis of 1995 and the steps taken by the central bank.
Source: @Ope Oluwa
In his own reaction, Kalu Aja of CFEI. Author, Making Money, the Economy and Personal Finance Easy to understand, he said, The CBN seems to believe that the main driver of inflation in Nigeria at this point is Monetary Expansion In effect, if all excess cash is removed from the system (not possible)…..inflation drops. Will that cause the food supply to improve? Food is the key driver of the rise in CPI according to @NBS_Nigeria
However, it’s important to agree that even if food is surplus, you can’t print N23t without any productive venture and not see the currency inflated
