Following the CBN Update on the Monetary policy, we want to take An In-Depth Look into Monetary Policy: Its Importance, Implementation, and Impact.
Meanwhile, GoldenNewsNg reports that Nigeria has suffered 17-year high inflation despite monetary policies
According to a recent report released by the National Bureau of Statistics, Nigeria’s headline inflation rate rose to 22.04% on a year-on-year basis in March, marking the highest rate since September 2005. This marks the third consecutive increase this year and a 0.13% point rise compared to February 2023 headline inflation rate. The report also highlighted that the cost of food and beverages had a significant contribution to overall inflation. The urban areas experienced a higher inflation rate of 23.07%, while the rural areas saw a 21.09% rate.
Despite the Central Bank of Nigeria’s tightening monetary policies to curb inflation, such as hiking interest rates and introducing the naira redesign policy, the overall inflation rate still increased. The bank has increased the interest rate six times since last year, from 11.5% to 19%. The CBN Governor, Godwin Emefiele, stated that the decision to continue hiking the Monetary Policy Rate (MPR) was taken to address inflation. The bank has maintained that it will continue to increase the MPR until inflation falls below 15%.
However, despite the adverse effect of the hike on the organized private sector, the CBN plans to continue with its policies until inflation is below 15%. The last time the monthly inflation rate was below 15% was in November 2020, which is about 27 months ago. The report also noted that inflation was pegged at 17.16% for 2023 according to the parameters and fiscal assumptions underpinning the 2023 Nigerian budget.
Now Let’s take An In-Depth Look into Monetary Policy: Its Importance, Implementation, and Impact.
Introduction:
Monetary policy is a crucial tool used by central banks worldwide to regulate the money supply, interest rates, and credit conditions in an economy. Its primary goal is to maintain price stability, foster economic growth, and achieve full employment. This article provides an exhaustive overview of monetary policy, including its definition, types, implementation, and impact.
Table of Content:
- What is Monetary Policy?
- Types of Monetary Policy
- Implementation of Monetary Policy
- Impact of Monetary Policy
- Criticisms of Monetary Policy
- Conclusion1. What is Monetary Policy? Monetary policy refers to the actions taken by a central bank to regulate the supply of money, credit, and interest rates in an economy. It is a crucial macroeconomic tool used to manage inflation, foster economic growth, and achieve full employment. The central bank’s primary responsibility is to maintain price stability by keeping inflation low and stable, usually around 2%.
2. Types of Monetary Policy There are two main types of monetary policy: expansionary and contractionary. Expansionary monetary policy involves increasing the money supply, lowering interest rates, and making credit more accessible to encourage economic growth. It is typically implemented during a recession or to stimulate economic activity. Conversely, contractionary monetary policy involves reducing the money supply, increasing interest rates, and making credit less accessible to combat inflationary pressures. It is implemented during times of high inflation to reduce aggregate demand.
3. Implementation of Monetary Policy Central banks implement monetary policy through various tools, such as open market operations, reserve requirements, and the discount rate. Open market operations involve buying or selling government securities to influence the money supply and interest rates. Reserve requirements refer to the minimum amount of cash that banks are required to hold in reserve, which affects the amount of money that can be loaned out. The discount rate is the interest rate at which banks can borrow from the central bank, and changes to it can impact the interest rates banks charge their customers.
4. Impact of Monetary Policy Monetary policy can significantly impact an economy’s performance. Expansionary monetary policy can lead to increased economic activity, such as higher consumer spending and business investment, which can result in higher employment rates. However, it can also lead to higher inflation if not implemented appropriately. On the other hand, contractionary monetary policy can reduce inflation but can also lead to reduced economic activity and higher unemployment rates.
5. Criticisms of Monetary Policy Despite its importance, monetary policy is not without criticism. Some argue that central banks have too much power and that their actions can lead to economic instability. Others argue that monetary policy can exacerbate income inequality, as low-interest rates can lead to asset price bubbles that benefit the wealthy. Additionally, some argue that central banks should not be solely responsible for macroeconomic stability and that fiscal policy should also play a more significant role.
6. Conclusion Monetary policy is a crucial tool used by central banks to regulate the money supply, interest rates, and credit conditions in an economy. Its primary goal is to maintain price stability, foster economic growth, and achieve full employment. However, the implementation of monetary policy can have significant impacts on an economy’s performance and can also be subject to criticism. As such, policymakers must strike a balance between ensuring macroeconomic stability and addressing its potential downsides.
