Nigeria s Experience with Monetary Policy Transmission

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Reynard Gray
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1 Nigeria s Experience with Monetary Policy Transmission Usman Okpanachi Monetary Policy Department

2 Outline Introduction Current Monetary Policy Framework Transmission Mechanism of policy Some Outputs and Outcomes Challenges/Looking Ahead 2

3 Introduction The core mandate of the CBN is to achieve and sustain: Price stability and non-inflationary growth Ensure a sound, safe and stable financial system in addition to other developmental functions The Bank conducts monetary policy with some level of autonomy Monetary Targeting Regime since 1974 Direct Monetary Control Indirect Monetary Control 1993 to present 3

4 Recent refinements: Current Monetary Policy Framework Introduction of Monetary Policy Rate (MPR) as in 2006 as the nominal anchor for interest rate Interest rate corridor around MPR for Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) (symmetric/ asymmetric) Operating Target to influence the overnight interest rate at the inter-bank money market Modification aimed at ensuring stability of short-term interest rates to engender efficient liquidity management and encourage inter-bank trading 4

5 Current Framework Both the operating target and intermediate targets are employed in determining the optimum level of money stock/liquidity consistent with the assumed level of expected output growth and inflation 5

6 Transmission mechanism Research evidence Not very robust at present but growing with continued investigation Some, not all interest rates, respond to innovations in the official interest rate (MPR) in the same direction Prime lending rate Inter-bank rates (call and OBB) TB rate 6

7 Transmission mechanism Deposit rates in particular either do not respond or do so inversely Banks adjust rather quickly the prices of earning assets of banks when MPR is raised but slowly downwards when MPR is reduced (30-90 days) Profit protection - faster upward response, delayed downward adjustment and non/inverse response of deposit rates Change in MPR has an inverse effect on credit to the private sector core, nfpe and states and LGs 7

8 Transmission mechanism Level of outstanding credit matters for availability Share prices also do margin loans - credit shift from other sectors Interest rate differentials also matter a great deal particularly for consumption expenditure Some studies have reported weak or nonexistent evidence of direct impact of monetary policy changes on real output However, indirect impact on output via the financial markets (credit, interest rate, and exchange rate and foreign exchange availability) cannot be ruled out 8

9 Transmission mechanism Combining with developments in other macroeconomic variables, aggregate demand is affected through financial market variables Transmission to inflation is mainly through the financial market variables (changes in MPR and exchange rate in particular) and changes in real output Output growth in the real economy could increase pressure on inflation 9

10 Transmission mechanism Somewhat compelling a trade-off between unemployment and inflation Changes in both real and nominal variables influence changes in inflation rate Monetary policy choices are generally guided by the few knowns Outcomes have continued to improve despite occasional shocks 10

11 Some Outputs and Outcomes Trends in Interbank Rate and Monetary Policy Rate, (Percent) Pre current Policy Period of Forebearance /01/ /04/ /06/ /08/ /11/ /02/ /04/ /07/ /10/ /04/ /06/ /09/ /12/ /07/ /09/ /12/ /02/ /04/ /05/ /07/ /08/ /10/ /11/ /01/ /02/ /04/ /06/ /07/ /08/ /10/ /12/ /01/ /03/ /04/ /06/ /7/ /9/ /02/ /12/ /03/ /3/ /09/ /06/ /04/ /9/ /03/ /12/ /2/ /03/ /5/2012 Interbank Call (%) MPR 11

Outputs and Outcomes Analysis of 40-month trend (2009 2012) reveals: Convergence of inflation metrics up to Jan 2012 Divergence started from Mar 2012 Maintained moderation in inflation variability

12 Outputs and Outcomes Analysis of 40-month trend ( ) reveals: Convergence of inflation metrics up to Jan 2012 Divergence started from Mar 2012 Maintained moderation in inflation variability (volatility) Provides an intuitive insight to the analysis of inflation outlook longterm inflationary pressures abating Core inflation that used to be lowest remained on the high side since March 11 12

13 Outputs and Outcomes Trend of inflation over the period largely mirrored M2 growth rate, suggesting continued relevance of money in inflation dynamics in Nigeria Relationship appears to remain strong 13

14 Outputs and Outcomes The use of MPR provides better signal of monetary policy stance than when the MRR was used. Inter-bank rates are stabilizing Deviation from M2 target in the last five years have moderated. Inflation rates have moderated significantly in relative terms, single digit since

15 Challenges Balancing the goal of financial stability and price stability Fiscal surprises/excessive fiscal Injections Government s fiscal operation complicates policy implementation Structural rigidities and weaknesses Inhibits responsiveness of the economy to monetary policy actions Lack of well-developed financial market leads to weak channels of monetary policy transmission mechanism 15

16 Looking Ahead Continue to broaden and strengthen regulation and supervision framework Coordination of fiscal and monetary policy by the authorities Strengthening the legal framework and Central Bank Independence More studies to elicit better understanding of MPTM 16

17 THANK YOU FOR LISTENING 17

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