How central bank can contain financial stress, fight inflation – IMF

THE International Monetary Fund (IMF) says recent events have shown central banks and policymakers can deal with sizeable financial stress without compromising their inflation-fighting stance.

In a report it released on Monday, June 5, the IMF expressed its observation that regulators and central banks were able to contain the impact of the collapse of Silicon Valley Bank and other United States regional banks, as well as Credit Suisse in Switzerland, without retreating on the inflation front.

It noted that in times of acute financial stress and high inflation, policy trade-offs were more challenging.

The ICIR can report that the Central Bank of Nigeria (CBN) aggressively raised its monetary policy rate from 11.5 per cent in April 2022 to 18.5 per cent in May this year to bring inflation back to target.

The rapid raising of the rates, IMF said, had stressed the balance sheets of exposed bank and non-bank financial institutions through declining values of their fixed-income assets and increased funding costs.

The IMF warned that the policy, if unmitigated, could threaten overall financial stability as increases in the rate transmit to the real economy in part by raising borrowing costs for households and firms.

To navigate the difficult trade-off, the IMF proposed that tools other than the policy rate could be used to contain financial stress.

It said, “Forceful and timely action by policymakers is required through aggressive financial policies. These include various forms of liquidity support, asset purchases, or possibly direct capital injections.

“Being sufficiently forceful, the interventions could leave monetary policy free to maintain its focus on inflation.”

It also suggested that critical actions needed to forestall a crisis might extend beyond what central banks can do alone.

It said, “While central banks can extend broad-based liquidity support to solvent banks, they are not equipped to deal with the problems of insolvent firms or borrowers, which must be addressed by governments.”

As such, the need for aggressive financial interventions becomes more acute as financial stresses intensify and insolvency risks grow, and the situation often requires committing sizeable fiscal resources.

The IMF explained that when inflation is still running high, it indicates that the central banks would be more flexible about the time frame for returning inflation to target.

In practice, this measure would likely put substantial downward pressure on inflation, thus realigning monetary and financial policy objectives.

“But emerging markets with weaker macro policy frameworks would likely have to confront the very difficult challenges posed by capital flight and currency depreciation-inflation spirals. Their central banks would have to remain vigilant about the need to maintain a nominal anchor, limiting any scope to ease.

“While these countries could take some steps on their own (for example, with capital flow management measures), a strong international safety net is vital to mitigate the risk of a prolonged and severe crisis,” the Fund stated.

It urged central banks to support non-banks like insurance firms, pension funds, and investment funds, which present important challenges, as the apex banks did during the global financial crisis and the COVID-19 pandemic.



    The ICIR reported that the CBN, on Tuesday, May 23, revoked the licences of 179 microfinance banks (MfBs), four primary mortgage banks (PMBs), and three finance companies for being inactive, insolvent, and failing to render returns, among other reasons.

    This happened in a country where the banking penetration is way below 40 per cent in the aggregate, the chief executive officer/principal partner with Afrique Capital and Equity Funds Limited, Kazeem Bello, said.

    “The failed naira redesigning policy and the terrible flaws and poor mismanagement of the implementation have resulted in about seven Nigerian banks sliding into serious distress.

    “I stuck to my gun on this and we shall soon set for the realities. Now they have started with the micro finance firms. Just wait and see,” Bello said.

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