The International Monetary Fund has warned central banks against locking themselves into fixed interest rate paths, saying monetary policy must remain flexible as economic conditions change.
In a new note, the International Monetary Fund said the practice of providing markets with clear signals about future interest rates has proven less effective in an environment of frequent inflation surprises, supply shocks and changing economic risks.
The News Chronicle reports that the warning is particularly aimed at the Central Bank of Nigeria, which has to contend with inflationary pressures, exchange rate gyrations and other domestic economic challenges.
The Fund recommended that policymakers should concentrate their communications on conveying their assessment of incoming data, inflation expectations and the effect of past rate decisions rather than providing projections that markets may take as endorsements.
It warned that adjusting a previously announced rate path could sow confusion and lead to unwarranted market turbulence.
The IMF also observed that social media and artificial intelligence-driven market analysis have made investors more nimble in dissecting and responding to central bank communications.
According to the Fund, interest rate guidance should always be conditional and only used when absolutely necessary, with price stability as the overriding goal.
For Nigeria, the advice could add impetus to the CBN’s need to retain its policy flexibility in balancing inflation, growth and financial market stability.
