OPINION: Communicating Monetary Policy More Effectively: A Case For Stronger MPC Justifications

The Central Bank of Nigeria (CBN) deserves commendation for its steadfast commitment to its statutory mandate of maintaining price and financial system stability. In a period characterized by significant domestic adjustments and heightened global uncertainty, the Bank has demonstrated resolve in deploying monetary policy to curb inflation, stabilize the foreign exchange market, strengthen external reserves, and preserve confidence in the financial system.

These efforts have contributed to notable improvements in key macroeconomic indicators and deserve recognition.
Beyond the formulation of sound monetary policy, however, effective central banking also requires clear and persuasive communication. Monetary Policy Committee (MPC) communiques are not merely records of policy decisions; they are strategic communication tools that shape the expectations of investors, businesses, financial markets, researchers, and the general public.

For this reason, they should clearly articulate the rationale underpinning policy decisions, particularly when those decisions may appear to diverge from prevailing economic indicators.
The latest MPC Communique (No. 163), issued after the Committee’s meeting of July 20-21, 2026, announced the decision to retain the Monetary Policy Rate (MPR) at 26.5 percent alongside other key policy parameters.

The Committee explained that its decision reflected a careful assessment of risks, particularly the renewed hostilities in the Middle East and their potential implications for global energy prices and domestic inflation.
While this explanation is understandable, the communique could have provided a stronger justification for maintaining such a restrictive monetary policy stance.

Interestingly, the communique itself highlights several developments that ordinarily strengthen the case for a gradual easing of monetary policy. It notes that headline inflation has moderated, albeit marginally, ending three consecutive months of increases. Core inflation has declined more significantly, reflecting greater exchange rate stability.

The twelve-month average inflation rate has continued its downward trajectory for the sixth consecutive month. Gross external reserves have increased to over $52bn, providing import cover far above internationally accepted benchmarks.

Furthermore, the Committee expressed optimism that inflation would continue to moderate over the medium term, supported by exchange rate stability, the lagged effects of previous monetary tightening, and improved food supply as the harvest season approaches.

Taken together, these developments suggest that the underlying domestic macroeconomic environment has become more supportive than it was when policy tightening was at its peak. Against this backdrop, readers of the communique may reasonably expect a more detailed explanation as to why the Committee considered it necessary to retain the policy rate at its elevated level rather than initiate a cautious easing cycle.

More importantly, the communique is noticeably silent on developments in monetary aggregates, particularly broad money supply. This omission is significant because monetary policy primarily influences inflation through monetary channels. The CBN directly controls liquidity conditions through instruments such as the policy rate, open market operations, reserve requirements, and other liquidity management tools.

Consequently, developments in broad money supply, domestic credit expansion, liquidity growth, and inflation expectations are among the most relevant variables that should feature prominently in explaining monetary policy decisions.

If broad money growth remained excessive relative to output growth and therefore continued to pose inflationary risks, communicating this explicitly would have provided a more compelling rationale for maintaining the current policy stance. Similarly, if underlying liquidity conditions remained inconsistent with the Bank’s inflation objective, stating so would have enhanced public understanding of the Committee’s decision.

Instead, the principal justification advanced in the communique centres on geopolitical developments in the Middle East and their possible spillover effects on international energy prices. While these are legitimate risks that no responsible central bank can ignore, they remain external factors beyond the control of the CBN. Monetary policy cannot prevent geopolitical conflicts, nor can it directly influence global crude oil prices. It can only respond to their domestic consequences.

For this reason, while external risks should appropriately form part of the Committee’s risk assessment, they should not appear to be the dominant justification for maintaining a restrictive monetary policy stance unless accompanied by a clear explanation of how those risks materially alter the domestic inflation outlook through monetary transmission mechanisms.

This distinction is important because central banks are ultimately evaluated on the basis of variables within their policy mandate. A stronger emphasis on domestic monetary conditions would reinforce public confidence that policy decisions remain firmly anchored on the Bank’s statutory responsibilities rather than on developments over which it has little influence.

The communique appropriately acknowledges the importance of fiscal policy coordination and commends the Federal Government for ongoing reforms, improvements in crude oil production, and efforts to strengthen macroeconomic fundamentals. Such recognition is entirely appropriate. Indeed, inflation in Nigeria has significant structural dimensions arising from insecurity, infrastructure deficits, logistics challenges, food supply constraints, and fiscal developments. These factors lie largely outside the direct control of monetary authorities.

Nevertheless, it is useful for MPC communiques to clearly distinguish between factors that monetary policy can directly influence and those that require fiscal or structural interventions. Where inflationary pressures stem predominantly from supply-side or structural factors, the Committee can appropriately draw the attention of the fiscal authorities, encourage complementary policy actions, and emphasize the importance of continued coordination. This approach preserves clarity regarding institutional responsibilities while fostering policy coherence.

It is equally important to recognize that MPC communiqués are intended to be concise, consistent with international central banking practice. They are not expected to become lengthy technical reports. However, brevity need not come at the expense of clarity. A few carefully crafted paragraphs explaining how domestic monetary indicators informed the Committee’s judgement would significantly enhance the explanatory power of the communique without compromising its conciseness.
Greater transparency in policy communication offers several benefits.

It improves the predictability of monetary policy, strengthens the credibility of the central bank, anchors inflation expectations more effectively, reduces uncertainty in financial markets, and promotes broader public understanding of policy decisions. Clear communication has increasingly become an essential instrument of modern central banking, complementing conventional monetary policy tools.

Admittedly, the CBN has made commendable progress in strengthening its communication framework over the years. The publication of MPC communiques, post-meeting briefings, and increased engagement with stakeholders have all contributed to improved transparency. The next logical step is to ensure that policy decisions are consistently supported by stronger explanations rooted primarily in variables within the Bank’s direct sphere of influence.

All said, effective monetary policy is not only about making the right decisions; it is also about convincingly explaining why those decisions are necessary. As the CBN continues to pursue its mandate of price stability in an increasingly uncertain global environment, strengthening the analytical content of its policy communication will further reinforce public confidence in the institution and enhance the effectiveness of monetary policy itself.

Prof Uche Uwaleke, a financial Economist, is the Director of Nasarawa State University Institute of Capital Market Studies and President of the Capital Market Academics of Nigeria