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CBN'S NEW MONETARY POLICY REGIME

By NBF News
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The monetary policy committee of the Central Bank of Nigeria (CBN) recently unveiled new measures to stabilise the banking sector of the economy. Under the latest monetary policy rate regime, the apex bank retained the prevailing Monetary Policy Rate (MPR), which is the rate at which the CBN lends money to commercial banks, thus forming a basis for onward lending by banks, at 6.25 percent.

However, it announced plans to mop up excess liquidity in the system. This, it did, by raising the Standing Deposit Facility (SDF) by 100 basic points to 4.25 percent, from the former 3.5 per cent. One significant implication of the retention of the prevailing MPR at 6.5 per cent is that it is yielding the intended objectives.

However, raising the Standing Deposit Facility implies that the economy may be awash with money, and therefore needs to be checked. It might also be an invitation from the CBN to the commercial banks to come and place huge deposits with it. This may be so because the Monetary Policy Committee, sometimes fondly called the 'wise men' of the CBN, left the Standing Lending Facility unchanged at 8.25 percent.

Beyond this, the CBN also expressed its readiness to maintain a stable exchange rate and close monitoring of inflation in the country. This is a strategic step because there are indications that inflationary trends are rising steadily, and the forecast for next year may be grim, if necessary steps are not taken to check the trend.

Put together, we welcome these monetary policy measures. If well executed, they will help tighten the regulatory framework in the sector and ensure stable and sound banking with minimal risk.

These steps are strategic for many reasons. First, a tight but reasonable control over the banks ensures an elastic currency, which enforces desired predictable behaviour by banks. Secondly, CBN's action may not be unconnected with the recent measure to bear risks at their barest minimum, after last year's failures in the system. Such memories make special precautions economically and politically appealing, because public confidence is crucial for the banks to succeed. In that regard, incentives and controls are necessary. They allow the banks to create credit in order to allocate it to socially desirable ends. To realise the target of the monetary policy rate, we advise the CBN to ensure full compliance.

Critical, also, is the need to mop up excess liquidity in the system. With elections fast approaching, it is imperative to check this, especially the likelihood of some banks indulging in unethical practices. Thorough supervision is necessary. CBN should also keep a close watch on government expenditure profile and borrowing, both internally and externally. Any lapses in properly checking these propensities of government can choke the economy and overcrowd the Gross Domestic Product (GDP). This could have a crippling effect on the economy and the private sector. Already, there is pressure on our Foreign Exchange, resulting in the current steep decline in external reserves.

Altogether, the CBN is right to anticipate likely crisis in the environment and respond, proactively, to envisaged internal and external pressures. We are, however, against the suggestion by the CBN Governor, Mr. Lamido Sanusi, that government should remove subsidies on essential services. The government should continue with the subsidy regime. Nigerians deserve it. What is wrong with subsidy, and should be frontally addressed by the relevant authorities, is the corruption that often comes with its administration.