The International Monetary Fund has urged the Central Bank of Nigeria and other monetary authorities to deemphasise monetary policy as a means of tackling the resurgence of inflation. In a new report titled “Rethinking monetary policy in a changing world,” the Washington‑based lender argued that the ability of central banks to set policy and steer the economy in more fraught times hinges on their independence.
The report notes that the low‑interest rates and modest public‑debt levels that followed the 2008 global crisis allowed central banks to overlook what were then relatively inconsequential interactions between monetary and fiscal policy. However, the COVID‑19 crisis dramatically altered the landscape: government spending rose sharply in many economies, and countries were hit by unprecedented supply shocks—largely the result of pandemic‑related disruptions such as broken supply chains, which added to inflation pressures.
“The pandemic demonstrated that monetary policy does not always control inflation on its own. Fiscal policy also plays a role. More importantly, the accompanying buildup of public debt raises the possibility of fiscal dominance—in which public deficits do not respond to monetary policy,” the IMF wrote. It added that while low debt levels and the need for stimulus allowed monetary and fiscal authorities to act in tandem after the global financial crisis, the prospect of fiscal dominance now threatens to pit them against one another.
The IMF warned that central banks may come into conflict with government desires. They can retain independence only by refusing to accede to any government attempts to monetise excessive debt, which would force authorities to cut spending, raise taxes, or both—a process known as fiscal consolidation. “Most important, the central bank must keep public opinion on its side, because the public is the ultimate source of its power and independence. That means the central bank should effectively communicate the rationale for its actions to retain public support, especially in the face of fiscally driven inflation,” the report stated.
Finally, the IMF emphasized that a central bank maintains its dominance when it can credibly promise not to bail out the government by monetising public debt in the event of a default.
Comments are closed for this story.