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Why We Decided to Float the Naira: Insights from CBN Governor Cardoso

Published by admin on October 7th, 2024.

Why We Decided to Float the Naira: Insights from CBN Governor Cardoso

Mr. Olayemi Cardoso, Governor of the Central Bank of Nigeria (CBN), has outlined the rationale behind the decision to float the Naira in the foreign exchange market. He stated that this move aims to align the official exchange rate more closely with market realities.

Previous CBN governors had considered similar actions due to persistent excess demand for foreign currency and pressures on the exchange rate, but they ultimately hesitated, fearing significant depreciation and potential macroeconomic fallout.

In his address to the Harvard Club of Nigeria in Lagos, Cardoso discussed his experiences since taking office and the financial turbulence that followed. He emphasized that the floatation policy was essential to bridge the gap between official and parallel exchange rates, which had fostered arbitrage and speculation, undermining market confidence.

“Credibility is the foundation of effective policy,” he asserted. “Without it, even the best intentions can fail. The decision to float the Naira faced substantial public criticism but was crucial for transparency and sound monetary policy.” He noted that this initiative has helped reduce speculative trading and stabilize the currency market.

Cardoso reiterated that combating inflation remains the CBN’s primary goal, even though the bank has not yet reached its targets. However, he highlighted recent data from the National Bureau of Statistics showing declines in inflation rates for July and August 2024, indicating progress.

He elaborated on the decision to increase the Monetary Policy Rate (MPR) to 27.25%, describing it as a necessary but tough choice. “While higher interest rates can be challenging for borrowers, they are essential for controlling inflation and managing excess liquidity in the economy. True leadership involves making difficult decisions for long-term stability over immediate comfort,” he concluded.