What to know about CBN’s MPC and monetary policy

The Central Bank of Nigeria (CBN), last Tuesday, announced a further increase in the benchmark interest rate, known as the Monetary Policy Rate, to 16.5 percent, the fourth straight hike this year.

The announcement came after a two-day meeting of the Monetary Policy Committee (MPC), chaired by Godwin Emefiele, governor of the CBN, in Abuja.

What is MPC?

MPC is a committee of the central bank established under CBN Decree 1999 (Amendment) and CBN Act of 2007 (Amended) to facilitate the attainment of price stability and to support the economic policy of the Federal Government, according to the apex bank.

What is monetary policy?

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

It means using central bank policies/measures to manage the quantity of money, interest rate, inflation rate, and exchange rate to make the economy benefit everyone in the areas of job creation and economic growth, said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

The composition of the MPC

The MPC consists of the governor of the central bank, who doubles as the chairman of the committee; the four deputy governors of the bank; the two members of the board of directors of the bank; three members appointed by the President; and two members appointed by the CBN governor.

Responsibilities of the MPC

The MPC has the responsibility within the bank for formulating monetary and credit policy. The appointment of a member of the MPC pursuant to sub-section 2 (d) and (e) of this section (the CBN Act), the remuneration, filling of temporary vacancies, qualification, tenure of office and disqualification shall be subject to the same terms as are stipulated for a director under sections 10 and 11 of the Act.

The provisions of the Second Schedule to the Act shall have effect with respect to the proceedings of the MPC, according to the CBN.

In pursuance of its functions in compliance with its core mandate, the CBN undertakes monetary policy in order to maintain Nigeria’s external reserves to safeguard the international value of the legal currency, promote and maintain monetary stability and a sound and efficient financial system in Nigeria, act as banker and financial adviser to the Federal Government, and act as lender of last resort to banks.

The MPC meets bi-monthly, except otherwise, in the event of an emergency.

Read also: Weak naira, inflation weigh on rate decision as MPC meets

What does the CBN’s interest rate hike mean for Nigerians?

“It translates into higher prices for the common man as the cost of borrowings will impact the cost of production. This will also impact negatively on the standard of living,” Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said.

What are the goals of monetary policy?

The ultimate goals of monetary policy are basically to control inflation, maintain a healthy balance of payment position in order to safeguard the external value of the national currency and promote adequate and sustainable level of economic growth and development. These goals are achieved by controlling the money supply in order to enhance price stability (low and stable inflation) and economic growth.

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.

To 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.

Can the Federal Government frustrate the CBN from pursuing its monetary policy?

Yes, when the federal government exceeds its revenue, the CBN finance government deficit through ways and means advances subject (in some cases) to the limits set existing regulations, which are sometimes disregarded by the Federal Government. The direct consequence of the central bank’s financing of deficits is distortions or surges in the monetary base, leading to adverse effects on domestic prices and exchange rates i.e. macroeconomic instability because of excess liquidity that has been injected into the economy.