IMF advises CBN to sterilise oil FX inflows to tame inflation
By Aboki Forex —
The International Monetary Fund has said the Central Bank of Nigeria may need to sterilise foreign exchange inflows from higher oil prices to curb rising inflation. The advice came in the IMF’s latest Article IV consultation report on Nigeria released on Tuesday.
Sterilisation is a monetary policy tool that allows the central bank to offset excess liquidity in the financial system, limiting the impact of foreign exchange activities on domestic money supply. The IMF said while higher crude oil prices could boost FX inflows, they also risk driving inflation higher.
“Given the changed inflation outlook, keeping the MPR unchanged for now and carefully monitoring inflation, the exchange market, and fiscal developments is appropriate,” the IMF said.
“The CBN may need to sterilise FX inflows from increased oil prices. The complex outlook makes it even more important for monetary policy to remain data-driven and respond accordingly if inflation pressures are more persistent than projected or if they turn out to be less pronounced, including from a strengthening exchange rate,” it added.
Nigeria’s consumer inflation picked up in March at 15.4 percent after slowing for eleven months straight, following the breakout of the US-Israel war against Iran in February. Price levels climbed further in April, rising 15.7 percent year-on-year on the back of spikes in food and energy costs.
The IMF noted that Nigeria’s monetary policy must remain focused on taming price pressures and anchoring inflation expectations. It commended the CBN for maintaining a tight policy stance with a positive real monetary policy rate since February.
The apex bank left interest rates unchanged at its last Monetary Policy Committee meeting in May, having cut the MPR by 50 basis points to 26.5 percent and lowered the Cash Reserve Requirement by five percentage points to 45 percent in February.
The Fund said the CBN’s introduction of a 7-day OMO instrument to manage short-term liquidity rates will help establish the MPR at the centre of monetary policy operations and target the overnight rate. It added that the CBN should normalise the CRR, implement reserve requirements on an average basis, and broaden coverage to include foreign currency deposits.