HOW CBN'S MONETARY POLICY AFFECTS ALL-SHARE INDEX - AKANJI
BY PETER EGWUATU
Former Director, Trade & Exchange Department of the Central Bank of Nigeria (CBN), Dr.(Mrs) Omolara Akanji has explained that the Monetary Policy(MP) of the apex bank affects the all-share index of the stock market.
Speaking at a bi-monthly Finance Correspondents forum in Lagos, sponsored by Zenith Bank Plc last week, Akanji noted that the interest rate in the money market has an inverse relationship with the pricing of shares at the stock market.
According to her, 'One of the monetary policy instruments used by the CBN in achieving certain macro economic objectives, such as low and stable inflation, healthy balance of payments, full employment, sustainable economic growth is the interest rate via Monetary Policy Rate (MPR). If the MPR is high, the interest rate charged by banks will be high and the reverse is the case.
So because of the inverse relationship between interest rate in the money market and price of stocks, investors will shift to the money market where they will have high return if the interest is high and the reverse is the case when interest rate is down, i.e, investors will move away from the money market and invest in the stock market as higher demand for shares would lead to higher prices.'
According to her, 'Monetary policy is a component of macroeconomic policy strategy to influence economic aggregates. It refers to deliberate use of instruments by monetary authorities/Central Banks to influence the supply, availability and cost of money/credit to achieve set broad economic objectives.'
Akanji, however, advocated for the independence of Central Bank in any economy to be able to achieve its macro economic objectives.
In her words: 'The goals of MP often conflict; hence, most Central Banks (CBs) focus on their area of influence - price stability. Depending on the mandate of CBs, the objectives of MP can go beyond price stability. In the developing countries like Nigeria, CBs are saddled with a dual mandate of ensuring price stability and sustainable growth/development.
To be successful, MP requires CB independence, policy transparency, effective communication system, financial system stability and proper coordination with other macroeconomic policies such as fiscal policy.
To this extent, she advised that the authority in charge of fiscal policy should ensure that its policy must not conflict with the monetary policy so as to achieve the expected macro economic objectives.
In her words, 'The fiscal policy should be complementary to the monetary policy so as to achieve the macro economic stability of the economy. A nominal anchor for MP is a single variable or device that the central bank uses to pin down expectations of private agents about the nominal price level or its path or about what the bank might do with respect to achieving that path. Most common intermediate targets are monetary aggregates, interest rate, exchange rate and inflation.'