Monetary policy consists of the process of drafting, announcing and implementing the plan of actions taken by the central bank, currency board or other competent regulatory authority of a country that determines the scope and impact of the key drivers of the economic activity in that country.

Monetary policy also refers to the specific actions taken by the Central Bank to regulate the value, supply and cost of money in the economy with a view to achieving Government’s macroeconomic objectives.

In terms of the objectives of monetary policy, there are two main views:
i. Monetary policy to achieve price stability; and
ii. To achieve price stability and other macroeconomic objectives.

Monetary policy is used to control the amount of money in circulation at any given time. In Nigeria, the Central Bank of Nigeria (CBN) achieves its monetary policy goal by regulating money supply. Regulation of money supply is based on the knowledge that there is a relationship between the quantity of money supply and economic activity and that if its supply is not limited to what is required to support productive activities; it will result in undesirable effects such as high prices and inflation.

Monetary Policy Rate is used to determine bank lending rates and the cost of credit for borrowers. In Nigeria, it had been held at a record high of 14 per cent since July 2016 when it was increased from 12 per cent. Recently, CBN reduced the monetary policy rate from 14 per cent to 13.5 per cent.

The legal backing for monetary policy by the CBN derives from the various statutes of the bank such as the Central Bank of Nigeria Act of 1958 as amended in CBN Decree No. 24 of 1991, CBN Decree 1993 (Amendment), CBN Decree No. 3 of 1997 (Amendment), CBN Decree No. 4 of 1997 (Amendment), CBN Decree No. 37 of 1998 (Amendment), CBN Decree No. 38 of 1998 (Amendment), CBN Decree 1999 (Amendment) and CBN Act of 2007 (Ammended) which is shown below.

Section 12 Sub-sections (1) to (5), CBN Act of 2007 (Amended)

  1. In order to facilitate the attainment of price stability and to support the economic policy of the Federal Government, there shall be a Committee of the Bank known as the Monetary Policy Committee (in this Act referred to as “the MPC”)
  2. The MPC shall consist of –
    1. the Governor of the Bank who shall be the Chairman
    2. the four Deputy Governors of the Bank
    3. two members of the Board of Directors of the Bank
    4. three members appointed by the President; and
    5. two members appointed by the Governor
  3. The MPC shall have responsibility within the Bank for formulating monetary and credit policy
  4. The appointment of a member of the MPC pursuant to sub-section 2 (d) and (e) of this section, the remuneration , filling of temporary vacancies, qualification, tenure of office and disqualification shall be subject to the same terms as are stipulated for a Director under sections 10 and 11 of this Act.
  5. The provisions of the Second Schedule to this Act shall have effect with respect to the proceedings of the MPC

The conduct of Monetary Policy in Nigeria and all activities of the Central Bank of Nigeria relate with the core mandate of the bank and therefore are best understood from this perspective. Consequently, in pursuance of its functions in compliance with the core mandate, the CBN undertakes monetary policy in order to:

  • Maintain Nigeria’s external reserves to safeguard the international value of the legal currency.
  • Promote and maintenance of monetary stability and a sound and efficient financial system in Nigeria.
  • Act as banker and financial adviser to the Federal Government; and
  • Act as lender of last resort to banks.

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