Inflation: IMF Caution Against Premature Rate Reduction

Eromosele Abiodun and Nume Ekeghe in Marrachech

The International Monetary Fund (IMF) has has stated that it supports further monetary policy tightening in a bid to tackle inflation, whih it  described as enemy of the poor.

The IMF said prematurely easing of policy measures could leave the economy vulnerable to heightened shocks.

Despite the postponement of the last Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) originally scheduled for September 25 and 25, 2023, the recent stance of the MPC has leaned towards maintaining a tightening approach.

President Bola Ahmed Tinubu, at the beginning of his term, emphasized his intention to reduce interest rates in the country, a stance that some analysts believe the newly appointed governor and deputy governors of the CBN may consider at the upcoming meeting, set to take place next month.

However, the IMF in its Africa: Special Issue launched at the ongoing 2023 Annual Meetings in Marrakech, Morocco, stressed the need for further tightening of monetary policy to address rising inflation.

The IMF’s African Department Director, Abebe Aemro Selassie, maintained that maintaining a further increase in benchmark interest rate is aimed at mopping up funds from the rich whilst helping the poor.

Stating that a further tightening is “pro poor”, he said countries that had sustained a hawkish monetary policy had been able to address and halt rising inflation. 

The report released last night specifically stated that, “in economies with still-elevated and persistent inflation, further mandatory tightening remains appropriate until there are clear signs that inflation is on track to meet the authorities’ inflation goals. This is critical to safeguard credibility and keep long term inflation expectations anchored.”

The report stated: “For Sub-Saharan Africa, the inflationary shock following Russia’s war in Ukraine has meant a growing number of people in situation of acute food insecurity, slowing international demand, higher borrowing costs, and ongoing exchange rate pressures yet another shock for a continent still emerging from the COVID-19 pandemic. The region has also faced increased political instability over the past few years, with recent military takeovers highlighting the implications of fragility.

“In many cases, inflation remains “too high, government borrowing costs are still elevated, exchange rate pressures persist, energy prices remain volatile, and political instability is an ongoing concern, the report gave four policy priorities for SSA countries.”

It urged countries to reduce debt vulnerabilities while creating space for development spending.

 “This demands a delicate balance between raising revenues and protecting growth, allowing the exchange rate to depreciate where needed, while also working to mitigate some of the follow-on effects of depreciation, including higher inflation and increased debt payments as well as invest in the future to improve living standards, particularly in resource-intensive countries where per capita income growth is expected to remain very low. Reforms include more investment in education, better management of resource-based wealth, improved business climate, digitalization, and greater trade integration, “it stated.