Rebuilding trust in monetary policy

The core mandate of any central bank is price stability: keeping inflation in check. But for emerging markets such as Nigeria, central banks must also rebuild credibility after years of unorthodox policy that left inflation high, foreign-exchange reserves thin, and confidence in the currency eroded.

That challenge was the focus of a recent discussion between Hélène Rey, Lord Bagri Professor of Economics at London Business School, and Olayemi Cardoso, Governor of the Central Bank of Nigeria.

“Right now there is a lot of volatility in international finance,” Hélène notes. Against that backdrop, the two explored how credibility and stability can be restored when both markets and the public have lost faith in monetary policy. Credibility is the foundation of growth; once it is lost, everything else in an economy wobbles.

Rebuilding, from the ground up

Those vulnerabilities are what Olayemi has faced in practice. The former Citigroup executive took office in September 2023, when inflation was soaring above 26 per cent, foreign exchange-reserves were low, and the naira’s black-market rate had sunk far below an overvalued official peg to the US dollar, sapping confidence in the currency.

The “crisis”, as Olayemi put it, ran deeper than currency markets. It reflected years of blurred boundaries between fiscal and monetary policy; how the government raises and spends money, and how the central bank manages interest rates and inflation.

That overlap was most visible in the central bank’s own balance sheet. For decades, it printed money to finance large parts of the government’s budget through “ways and means” advances, effectively an overdraft, fuelling inflation in the process.

Reversing that legacy has meant, in Olayemi’s words, a return to “orthodox monetary policy”: raising interest rates sharply, beginning to end direct financing of government deficits, and allowing markets to determine the naira’s exchange rate, rather than maintaining an official peg to the dollar.

“We came into a situation where we had gone out of orthodoxy, and that in itself created an enormous amount of challenge: extreme liquidity overhang, and funding not going into the right sectors,” Olayemi says.

The shift back to orthodoxy is bearing fruit: inflation has eased markedly, falling from about 33 per cent a year ago to around 18 per cent today. The path has not been smooth, with the removal of popular but pricey fuel subsidies causing inflation to spike last year before stability returned.

With inflation easing, Rey turns to the question of how clearly the central bank defines its targets. When Olayemi says his goal is to bring inflation down to single digits “in the medium term,” she smiles and gently points out the ambiguity.

Why a stable currency matters

Rey then shifts the discussion to Nigeria’s exchange-rate reforms. A key pillar of Nigeria’s economic overhaul was the unification of its official and black-market exchange rates in June 2023.

Before then, the official rate was kept artificially high, so the government lost revenue when converting its oil earnings into naira, while the overvalued currency also made Nigerian farm goods and manufactured products less competitive abroad.

Meanwhile, a much weaker black-market rate encouraged profiteering and created shortages of foreign currency.

The unification of Nigeria’s exchange rate was announced three months before Olayemi became governor in September 2023, but he has continued the shift to a “willing buyer, willing seller” market, where the naira’s price is set by supply and demand.

“There has been a fundamental shift in the whole way foreign exchange is looked at and is managed,” the central banker says. “When we came in… People couldn’t get hold of foreign exchange. There was a huge backlog of unpaid debts, about $7 billion. And daily requests could not be met. So it was a real crisis.”

The move to unify the rate triggered a sharp currency devaluation, pushing up import costs. But, Olayemi argues,what matters now is the stability and predictability of the exchange rate, not just its level.“Nigerians are very comfortable. We can plan, we know what it’s likely to be,” he says of the rate.

A hedge against global volatility

Rey broadens the discussion to global finance, noting the recent volatility in the US dollar and asking how it affects Nigeria’s monetary policy. It is Africa’s top oil exporter, and oil is sold in dollars, so any swing in the US currency affects how much the country earns from exports, and whether foreign investors bring money in or pull it out.

Rey notes: “The dollar has been behaving a little bit unusually, with co-movements between equity prices and the dollar that are very unusual according to historical data.”

Normally, the dollar is seen as a haven currency, so it strengthens when investors are nervous and markets fall, then drops when confidence returns.Lately, though, the dollar has been falling at the same time as stocks and bonds have been rising, a pattern that she says has added to global volatility and uncertainty for policymakers like Olayemi.

The central banker says, however, that Nigeria has been largely shielded from the latest bout of currency turbulence thanks to earlier reforms to its exchange-rate system and monetary policy.

“When the emerging-market currencies all largely depreciated at that time (in April), we were hardly touched,” says Olayemi, referring to US President Donald Trump’s “Liberation Day” tariff announcement that unsettled markets in the spring of 2025.

Investors often react to uncertainty by pulling money out of riskier countries, which can make emerging-market currencies fall, but Nigeria’s reform programme helped the naira avoid the same pressure.

Innovation without anarchy

The conversation shifts to technology. Rey asks how central banks should respond to cryptocurrencies and the rise of stablecoins pegged to the US currency, and whether there is, as she puts it, “any fear of dollarisation”.

Because stablecoins increase dollar use in developing economies, they raise concerns that countries like Nigeria might lose some control over their own monetary systems.

Olayemi says the spread of digital currencies cannot simply be ignored. Nigerians have been using them for payments, savings and moving money abroad, especially when access to foreign exchange was limited. Crypto has become too entrenched to “wish away,”he explains, so regulators such as Nigeria’s Securities and Exchange Commission are now working out how to engage with them.

Innovation is welcome, he adds, but it must be balanced with an understanding of the risks, such as fraud and capital flight.

The social purpose of stability

Rey expands the discussion again, asking how the Nigerian central bank thinks about long-term structural issues, such as climate change and inequality.

Olayemi responds that climate shocks are “not good for us,” linking them directly to Nigeria’s agricultural sector and food security. Those risks are significant: droughts and floods pose an obvious threat to an economy in which agriculture accounts for about a quarter of GDP and employs roughly 30 per cent of the workforce.

“We are agrarian, and it’s in our interest to continue to develop our agrarian sector and ensure that food security is a priority,” Olayemi says, using the shorthand for an economy largely based on farming.

It was a fitting conclusion to a conversation that linked economic policy to everyday realities.

The discussion was hosted by the Wheeler Institute for Business and Development at London Business School, which brings together policymakers and academics to examine how economic ideas play out in practice.

Watch the event here: