Effect of Monetary Policy in Nigeria

Monetary Policy is the procedure by which the financial expert of a nation, similar to the national bank or cash board, controls the supply of money. Regularly focusing on a inflation rate or interest rate to guarantee value solidness and general trust in

Since the Central Bank has the exclusive right to issue money in the economy, it can have extensive influence on the determination of interest rate in financial markets and in the economy as a whole, by adjusting the interest rate on short-term loans to financial institutions. Central Bank interest rates on these loans therefore have the most immediate impact on other short-term interest rates in the money market. By influencing interest rates, monetary policy then has an effect on the savings and expenditure decisions of individuals and corporate.

Inflation is closely related to interest rates, which is the interest paid for a loan. Interest rates are set by the FOMC. When interest rates go down, people will borrow more and spend more money causing inflation. When interest rates are too low, inflation will also be lower than expected. In order to resolve these types of problems, the government applies certain policies and/or lowers taxes. The government might apply either monetary policy, which is used by the government to influence the inflation rate or interest rate ensure price stability and general trust in the currency by controlling the supply of money or a fiscal policy, which affects aggregate demand through spending and taxes. The changes in interest rates can also influence other parts of the economy. For example, when the FED increases interest rates, mortgage rates and credit card rates are expected to be higher. This is not good for the economy because the higher mortgage rate are the less people want to buy houses and the less money

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

The main goals of monetary policy are to have modest long-term interest rates, steady prices, and the lowest level of unemployment. The Federal Open Market Committee is responsible for setting the goal amount of the federal funds rate, which is the rate at which banks can

Monetary policy uses changes in the quantity of money to alter interest rates and in turn affect the level of overall spending. The object of monetary policy is to influence the nation’s economic performance, as measured by inflation, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by the Central Bank and influences money supply.

In every country of the world, exchange rate level is the paramount target of economic policy targeting. In other words, exchange rate policy should be geared towards the attainment of long-term equilibrium rate, so as to achieve certain macro-economic objectives e.g. balance of payments equilibrium, through proper management of the Nigerian exchange rate policy. The country started operating the floating exchange rate system in 1986 after the introduction of SAP. It was expected that the country experience development but the reverse was the case because the country suffered consistent hopeless development situation as her naira depreciates often against other foreign currencies, especially the dollars which was universally accepted as the global medium of exchange. Before the floating system was introduced, $1=NO.89 but after that in 1966 we have $1=N22.05 and even today we have $1=N150.7 .This is quite disheartening, regardless of the effort of the government of Nigeria through the activities of the regulatory body such as the establishment of second tier foreign exchange market (SFEM) in 1986 and interbank foreign exchange market (IFEM) in 1989 and currently the foreign exchange market (AFEM) in 1995.

The monetary policy was successful in the inflation targeting(IT) framework, which them main difference to the multiple-goal approach is that IT puts price stability at the first.. The IT practice can helped central bank to get well inflation expectation of their goal of price stability.

tolerate temporary deviations, to allow a greater stabilizing role of monetary policy. With regards to

Central banks use a money based policy to minimize inflation. They have diverse ways that they do this. For example, the most common way is by raising the rates of the interest and selling securities through open operations in the market. The use of a multiplication of related money within a policy to lower unemployment and avoid the period where people and businesses make less money. The lower the rates of interest will only buy securities from different banks and cause liquidity to increase. In a perfect world, a money based policy should work beside with the national government's policy. However, it rarely works this way. That's because government leaders get re-elected for decreasing taxes and expanding spending. This would mean rewarding people that actually vote and obtain series of actions to reach a goal of contributors that result in a direct, but in an upsetting way. As a result, a policy like a Monetary Policy is usually involves expansion related topics. However, to avoid a great inflation, the policy must be serving to severely limit or control

Federal governments through the central banks bear the role sustaining a stable economy for its citizens. Besides the fiscal policy, monetary policy is a core approach utilized to regulate the money supply in the economy. In an economic perspective, increased money supply strengthens the consumers ‘purchasing power prompting them to continue borrowing with an urge to invest. Consequently, interests rate raises while the price for bonds lowers, thus causing inflation. To level, the government may intervene in central banks by increasing the bank lending rate as a strategy to reduce supply of money in the market.

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic

| Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put

Furthermore, banks act as a conduit for the transmission of monetary policy. They provide a veritable platform when it comes to the implementation of monetary, credit, foreign exchange, and other financial sector policies of the government. Among other things, monetary policy is designed to influence the cost and availability of loanable funds with a view to promoting non-inflationary growth. The instruments available to the Central Bank to achieve this include open market operations (OMO), the cash reserve ratio (CRR), liquidity ratio (LR) and of course, moral suasion. The capacity of the banking industry to perform these functions effectively is, to a large extent, determined by the financial health of the individual institutions themselves and soundness and viability of the industry as a whole. For instance, where the majority of banks are adjudged to be weak and unhealthy, that will impair the ability of the industry to lubricate economic growth and vice versa. Against this background, the objective of this presentation is to examine the extent to which the banking industry has helped to stimulate economic activities in Nigeria and what the prognosis looks like in the post-consolidation era, come January 2006.