Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. -Wikipedia
Monetary policy instrument includes: Open Market Operations (TBills and Government Bond), Monetary Policy Rates and Reserve Requirement.
Macroeconomics factors on the other hand refers to economic factors that aggregates the economy as a whole. These factors are Inflation, Unemployment, Savings and Investment and Economic Output (GDP).
This articles examines how the Apex bank responded to rise in Inflation rate with monetary policy instruments in Year 2016.
Inflation Vs Treasury Bill rates and Monetary Policy rate
Data Source: CBN
In its effort to fulfill one of its core mandate of controlling the amount of money in circulation and thereby bring about price stability and reduced inflation. The Apex bank continued to increase the TBills and Monetary Policy rate throughout the year in response to continuous increase in inflation.
High Treasury Bill rate is expected to attract more investment in TBills thereby reducing the money available to be spent on consumer goods while high MPR is expected to increase bank lending rates making it unattractive to borrow from banks so less money is pumped into the circulation and consequently reduced money to be spent on goods and services.
These contractionary policies were however unable to achieve the desired objective as inflation continues to rise during the year despite high TBills rates and high MPR.
These policies has also helped to acerbate the current economic recession in the country as continuous liquidity squeeze of the economy is not a panacea for economic recovery during recession.
For monetary policy to be effective CBN should pursue vigorously it Financial inclusion strategy aimed at reducing the number of unbanked adult Nigerians to 20% by Year 2020.
The Agency Banking initiative, Tiered KYC objectives and the Mobile Banking drive should be make mandatory for banks so as to have banking presence in remote areas and minds where there are no banks and allow more people into the financial dragnet before monetary policy pursuits can be effective.
As at October 2016, it was estimated that about N1.5 trillion is outside the banking sector a figure financial observers considered really conservative considering the level of informal financial activities in Nigeria.
It is only when a developing country like Nigeria has been able to achieve financial inclusiveness for almost all eligible Nigerians that monetary policies can be effective.