CBN Governor Cardoso Explains Surprise Monetary Policy Decision, Cites Stronger Reserves

The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, has explained that improving economic conditions and the need to fix weaknesses in monetary policy transmission informed the apex bank’s latest policy decision, which reportedly caught financial markets by surprise.

Cardoso spoke during a session titled How Central Banks Decide at the ongoing International Monetary Fund (IMF) and World Bank Annual Meetings in Bangkok, Thailand.

Responding to a question from IMF First Deputy Managing Director Dan Katz about how the CBN managed market reactions to the unexpected decision, Cardoso said prior reforms and deliberate communication helped limit disruption.

“You are absolutely right. It took the market by surprise, and markets, as we know, generally don’t like surprises,” he said.

The CBN governor identified improved coordination between fiscal and monetary authorities as one of the developments that strengthened the policy framework ahead of the Monetary Policy Committee (MPC) meeting.

He said both authorities had signed a memorandum of understanding to improve coordination and ensure a common understanding of economic policy priorities.

Cardoso also cited the introduction of an overnight financing rate, which he said provided greater clarity about prevailing interest rate conditions.

According to him, Nigeria’s external reserves had reached their highest level in 18 years, inflation was consistently declining, and economic growth remained at a reasonable pace.

These developments, he said, created an opportunity for the CBN to address weaknesses in the transmission of monetary policy to the wider economy.

“These all put together a situation where we felt that we were in a relatively good place to do something we could have done earlier,” Cardoso said.

Why Nigeria’s Inflation Experience Differs

Cardoso also stressed that Nigeria’s monetary policy decisions must reflect domestic economic realities rather than simply follow the actions of central banks in other countries.

He explained that Nigeria’s inflation trajectory differed from that of many economies because major policy changes, including foreign exchange harmonisation and petrol subsidy removal, occurred at a different stage of the global inflation cycle.

“Our inflation cycle was pretty much different from much of the rest of the world, because we did certain things like the foreign exchange harmonisation, the lifting of subsidies at a different time in the inflation cycle of most of the countries,” he said.

He added that inflationary pressures in Nigeria emerged at a time when several other countries were beginning to ease their monetary policies.

Cardoso acknowledged that the MPC monitors developments in major economies, including the United States, but maintained that Nigeria’s policy direction must be determined by its own economic conditions.

Cardoso Explains How the MPC Reaches Decisions

The CBN governor said independent thinking among MPC members was essential to sound decision-making and helped prevent groupthink.

He explained that the committee comprises 12 members, seven internal and five external, with external members providing independent perspectives and challenging prevailing assumptions.

According to Cardoso, the CBN deliberately brought in independent-minded external members during the transition from currency crisis to economic stabilisation to strengthen deliberations and policy credibility.

He said members receive relevant economic data before meetings and are free to examine the information, seek clarification from the secretariat and conduct scenario analyses before deciding their positions.

Cardoso also said he does not hold pre-meetings with internal members to reach conclusions before formal MPC sessions.

“I don’t hold meetings with internals and come to a conclusion on the MPC meetings before we go there. I don’t do that,” he said.

He added that effective committee leadership involves identifying areas of agreement before addressing disagreements, while also examining members’ published statements to understand their reasoning.

Communication and Market Confidence

Cardoso said communication played a significant role in helping financial market participants understand the rationale behind the unexpected policy decision.

He explained that he spent more time than usual engaging journalists after the MPC meeting, outlining the economic challenges Nigeria had faced, the reforms implemented and the progress achieved.

Rather than merely announcing the policy outcome, he said, the CBN needed to explain the reasoning behind its action.

Cardoso noted that market participants were already familiar with weaknesses in monetary policy transmission because of their experience operating in the financial markets.

He maintained that the market’s response also reflected the credibility the CBN had built over time.

“To do such a thing successfully, you must have an element of credibility with the market,” he said.

“The market must have consistently seen you over a period of time doing things in the right way and believe they can put their trust in you,” he added.