ROLE OF MONETARY POLICY IN THE MANAGEMENT OF INFLATION IN NIGERIA.
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ROLE OF MONETARY POLICY IN THE MANAGEMENT OF INFLATION IN NIGERIA.
Chapter one
1.1 Introduction
Monetary policy is critical to every economy because it serves as a conduit for financial resources to flow from one sector to another. As a result, it serves as the primary foundation of today’s market economy.
Essentially, monetary policy has three key roles: monetary policy, financial stability, and general economic. In the modern Nigerian context, monetary policy refers to central bank activities that affect the cost and availability of commercial and merchant bank reserve balances, as well as the overall monetary and credit conditions in the economy (Akaku 1993).
The basic purpose of such activities is to ensure that, over time, the expansion of money and credit is sufficient to meet the long-term needs of the growing economy at stable prices.
However, the short-term goals of monetary policy include countering inflationary pressures, restoring a sustainable balance of payments, achieving full employment levels of resources, ensuring equitable income distribution, and maintaining a stable currency rate at an internationally competitive level. Monetary policy reforms are sometimes implemented as part of coordinated efforts to reduce barriers to savings growth and effective investment allocation.
As is frequently the case, the pursuit of these short-term aims tends to conflict with the underlying goal of stability and long-term For example, a strong anti-inflationary attitude would normally need sacrificing output growth in the short run.
Similarly, restoring a healthy balance of payments might be prioritised. Similarly, achieving a stable exchange rate may necessitate tighter control over aggregate demand, which would have a negative impact on output. Furthermore, achieving the goal of exchange rate stability in local currency, with associated cost pressure on the price level.
To summarise, complex trade-offs are inherent in monetary policymaking, making the central bank a focus of criticism and many types of pressures. Monetary policy’s aims have been consistent over time: achieve internal and external balance. However, the emphasis on techniques/instruments to attain those goals shifts throughout the year.
The important period in the pursuit of monetary policy that is being investigated occurred between 1992 and 2006. Prior to 1986, the economic environment that influenced monetary policy was characterised by the oil sector’s dominance, the growing importance of the public sector in the economy, and an overreliance on the external sector.
To maintain price stability and a healthy balance of payment position, monetary policy relied on direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, and the imposition of cash reserve requirements and special deposits.
The deployment of market-based instruments was not viable at the time due to the immature condition of the financial markets and the purposeful constraint on interest rates.
However, in response to the 1980s global oil market meltdown and the resulting deterioration in economic conditions, the Structural Adjustment Programme (SAP) was implemented in July 1986.
This programme was designed to achieve fiscal balance and balance of payments viability by changing and restructuring the economy’s production and consumption patterns, eliminating price distortions, reducing the heavy reliance on crude oil exports and consumer goods imports, expanding the non-oil export base, and achieving long-term growth. Other goals included rationalising the role of the public sector and accelerating the potential of the private sector.
Given the critical role that effective monetary policies play in monetary policy, financial stability, and overall economic activity, the Central Bank of Nigeria has established a set of national monetary policy objectives to serve as a broad guideline and framework for all monetary policy initiatives.
The goal of establishing the objectives of the National Monetary Policies is to ensure that the system is available without interruption, that all user needs are met to the greatest extent possible, and that it operates at the lowest risk and appropriate cost.
Over the last 10 years, the Central Bank of Nigeria (CBN), in partnership with the Bankers Committee, has started the first significant initiative to modernise monetary policy.
The initial goal was to automate the cheque clearing system and make it a viable foundation for the development of electronic payment channels. Previously, cheques were processed and bank net settlement positions were calculated manually.
The installation of new procedures and guidelines based on MICR technology transformed the cheque clearing process. As a result, a Centralised Automated Clearing process was established in the Lagos clearing zone, in which necessary information on cheques is captured using MICR Reader Sorters, built into clearing files
and electronically transmitted to the clearing house, from which the net settlement position of participating banks is automatically computed and electronically transmitted to the Central Bank.
The role of monetary policy in managing inflation is an essential topic that can contribute significantly to nation development. It can also be viewed as an academic resource for students to learn about the various types of monetary policies available and which are most effective in managing inflation.
A monetary policy is a set of instructions and procedures that govern the transfer of value and the settlement of liabilities resulting from the exchange of commodities and services within a certain market.
The ultimate purpose of any monetary policy is to ensure that the exchange of monetary value occurs with the least amount of risk, annoyance, and cost. To be described as efficient, a monetary policy must be consistent, timely, accessible, secure, and cost-effective.
The 1990s saw a surge of ingenuity in the construction of electronic monetary policy in the Western world, but consumer and industry adoption was delayed. However, the first setbacks did not deter the creators of these novel payment methods.
Today, technological breakthroughs have enabled the introduction of a wide range of electronic payment instruments that were unheard of a few decades ago.
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