CBN may need to sterilise FX inflows from increased oil prices to curtail inflation – IMF

CBN may need to sterilise FX inflows from increased oil prices to curtail inflation – IMF

The Central Bank of Nigeria (CBN) may need to sterilise FX inflows into Nigeria from higher oil prices in order to rein in inflationary pressures, the International Monetary Fund (IMF) said Tuesday.

Sterilisation, a monetary policy tool, allows the central bank to limit the impact of foreign exchange activities on the domestic money supply by offsetting excess liquidity in the financial system.

IMF issued the advisory in its latest Article IV consultation report on Nigeria, noting that while rising crude oil prices could boost foreign exchange inflows into the country, it is capable of 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 multilateral institution 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.

Consumer inflation in Nigeria picked up in March at 15.4 per cent, after slowing for eleven months in a row, following the breakout of the US-Israel war against Iran in February. Price levels further climbed up in April, rising 15.7 per cent 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, and commended the CBN for maintaining a tight policy stance with a positive real monetary policy rate (MPR) since February.

The apex bank left interest rate unchanged at its last monetary policy committee meeting in May, having cut the MPR by 50 basis points to 26.5 per cent and lowered the Cash Reserve Requirement (CRR) by five percentage points to 45 per cent in February.

The Fund said the CBN’s introduction of a 7-day OMO instrument to manage short-term liquidity rates will help to 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.