The International Monetary Fund has encouraged the Central Bank of Nigeria and other monetary authorities to deemphasise monetary policy as a strategy for combating the rise of inflation.
In a recent research titled “Rethinking monetary policy in a changing world,” the Washington-based lender said the capacity of central banks to formulate monetary policy and govern the economy in more challenging times rests on its independence.
According to the paper, the low-interest rates and less excessive public debt levels that existed following the global crisis of 2008 encouraged central banks to disregard what was then considered unimportant interactions between monetary and fiscal policy.
But, during the COVID-19 crisis, conditions changed rapidly, and government expenditure grew substantially in many nations, the research concluded.
It emphasized that although expenditure was soaring, nations were struck with supply shocks of unprecedented scale, mostly the consequence of pandemic-related problems—such as supply chain disruptions, which contributed to inflation pressures.
Analysts forecast reduced inflation as consumer demand decreases
The report said in part, “The pandemic revealed that monetary policy does not always manage inflation on its own. Fiscal policy also has an influence. More crucially, the simultaneous rise of public debt created the risk of fiscal dominance—in which public deficits do not react to monetary policy.
“Whereas low debt levels and the need for stimulus permitted monetary and fiscal authorities to operate in unison during the global financial crisis, the potential of fiscal supremacy now threatens to push them against one another.”
Noting that the central bank’s position may come into conflict with the government’s desires, the IMF said central banks could retain independence only if they promise not to accede to any government desires to monetise excessive debt, which would then force authorities to cut spending or increase taxes, or both—so-called fiscal consolidation.
“Most important, the central bank must maintain public opinion on its side, since the public is the ultimate source of its authority and independence. It implies the central bank should properly convey the reasoning for its actions to preserve public support, particularly in the face of fiscally induced inflation.
“A central bank ultimately retains its supremacy if it can credibly pledge that it would not bail out the government by monetising public debt if there is a default,” the paper said further.
