How monetary policy decisions of CBN affect you

The Central Bank of Nigeria (CBN) began on Monday its two-day Monetary Policy Committee (MPC) meeting and will announce its outcome on Tuesday.

What is monetary policy?

This concept defines any policy measure designed by the government or central bank to control the cost, availability and supply of credit, according to the CBN.

Monetary policy can be described as a central bank’s action to influence the availability and cost of money and credit, as a means of promoting national economic goals.

Specifically, it can be defined as a combination of measures designed to regulate the value, supply and cost of credit in an economy in consonance with the expected level of economic activity. In broad terms, monetary policy aims at achieving price stability, full employment and economic growth, exchange rate stability, low interest rates and balance of payments equilibrium.

However, recent experiences indicate the narrowing of the objectives of monetary policy to that of price stability. This is in realisation of the fact that the achievement of all other objectives can be accomplished under stable prices in the medium to long-term, according to Ajayi, M. (2007), Monetary Policy Transmission Mechanism in Nigeria, CBN Economic and Financial Review. 45(4), 39-67.

How can the MPC be described?

The MPC is statutorily charged with responsibility for the conduct of monetary policy in Nigeria. The committee formulates and monitors implementation of monetary policy to achieve the monetary policy objectives.

How do the decisions of the MPC affect you?

Changes to monetary policy affect interest rates in the economy, while changes to interest rates affect economic activity and inflation. Consequently, this directly or indirectly affect you.

The decision of the MPC affects the cost of borrowing, said Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise.

“The more the interest rate goes up, it affects the operating costs of businesses that borrowed money from the banks,” he said.

“It makes it difficult for you to borrow money. It poses risks of default when the interest rates are high due to the high cost of servicing debt.”

“Inflation is still rising despite the tightening stance of the CBN, there is a surge in money supply and this may compel the CBN to take further tight decision on the monetary policy rate,” he added.

Nigeria’s inflation accelerated to 22.79 percent in June 2023 from 22.4 percent in May, according to the National Bureau of Statistics (NBS).

The MPC, chaired by the governor of the CBN, commenced its series of monetary policy rate (MPR) hikes in May 2022, raising ot from 11.5 percent to 18.5 percent in May this year.

For Uju Ogubunka, president of Bank Customers Association of Nigeria (BCAN), the MPC takes a decision on interest rate and this affects you as a borrower or saver.

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He said: “When the CBN raises its benchmark interest rate, the cost of borrowing goes up and banks will increase savers’ rate. If the MPC chose to lower the rate, there would be more money for borrowers.

“If the direction of the decision is on inflation, it will affect you because you participate in the economy. So when the price of goods goes up and down, it will affect you.”

When does monetary policy changes affect the economy?

Empirical evidence from Nigerian data indicates that changes in base money take about two months to affect the money supply, the main intermediate target of policy.

Changes in money supply in turn take about 12 months to affect output. Thus, it takes about 15 months for changes in CBN monetary policy action, via base money and money supply (M2) to have its full impact on output.

On the other hand, and contrary to evidence in other countries, the relationship between output and inflation seems weak and unstable but more stable between money supply and inflation.

It takes about 24 months for money supply to have its full impact on inflation; but using exchange rate and money supply as explanatory variables, the effect on inflation actualizes within one year, said Ajayi.

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What are the two major phases in the conduct of monetary policy in Nigeria?

The two major phases are the period before the introduction of the Structural Adjustment Programme (SAP) in 1986, and the period since the introduction of SAP. In the first period, the CBN’s monetary policy framework placed emphasis on direct monetary policy control, while in the second period it relied, and is still relying, on an indirect approach anchored on the use of market instruments in monetary management.

What are the prerequisites for successful monetary policy?

A successful monetary policy is a function of certain fundamental imperatives. Among others, relevant legal and regulatory framework, deep and broad financial market, good understanding of monetary transmission lag, and availability of timely and accurate data and information for the monetary authorities are crucial for successful monetary policy.