The Central Bank of Nigeria has recently highlighted the positive impacts of its monetary policies on the country’s economy. Isa AbdulMumin, the Director of the Corporate Communications Department at the apex bank, emphasized this perspective in response to the latest inflation rate figures released by the National Bureau of Statistics (NBS). According to the NBS report, the inflation rate experienced a marginal increase to 27.33% in October, rising by 0.61% compared to September’s 26.72%. Despite this increase, AbdulMumin remains optimistic, attributing the rise to the slow yet steady influence of the central bank’s ongoing financial reforms.
AbdulMumin expressed confidence in the effectiveness of the central bank’s strategies and highlighted the impact of its measures on the money market, particularly in October. He underlined the belief that the slight rise in prices during this period signifies that the bank’s policies are yielding the desired results. The central focus of the bank’s leadership is stabilizing the naira and reducing inflation. To achieve these objectives, the central bank has implemented robust measures, including adjustments to liquidity tools. The Open Buy Back rates have surged from less than one percent in August to the expected levels.
The CBN plays a crucial role in the country’s financial system, managing monetary policies that contribute to economic stability. One of the tools in its toolkit is the Standing Deposit Facility (SDF) policy, designed to regulate liquidity in the banking sector.
The standing deposit facility serves as a critical monetary policy instrument used by the CBN to manage excess liquidity in the banking system. It acts as a repository where banks can overnight deposit funds with the central bank, concurrently earning interest on these deposits. The primary objective of the SDF policy is to exert control and stability over the level of liquidity circulating within the banking system. By providing a secure and interest-bearing avenue for banks to park surplus funds, the CBN aims to exert influence over the money supply, contributing to the maintenance of price stability.
The interest rates associated with deposits made through the SDF are meticulously determined by the CBN, serving as a motivating factor for banks to either deposit or withdraw funds based on prevailing economic conditions. Eligibility for participation in the SDF extends to commercial banks and other financial institutions operating within Nigeria. The SDF allows banks to efficiently manage their daily liquidity requirements, providing a flexible mechanism to meet their financial obligations.
In addition to the SDF, the Central Bank employs Open Market Operations (OMO) as a policy tool. This strategy involves buying and selling government securities in the open market, with treasury bills and bonds being the primary instruments in focus. When the CBN purchases these securities, it injects liquidity into the financial system, thereby augmenting the overall money supply. Conversely, selling securities absorbs money from the system, effectively reducing liquidity.
OMO functions as a crucial lever for the CBN to regulate the amount of money in circulation, subsequently influencing interest rates. Purchasing securities bolsters the money supply, leading to lower interest rates, while selling securities achieves the opposite effect, pushing interest rates upward. OMO proves to be an invaluable tool in combating inflation, as the CBN can adeptly manage inflationary pressures by adjusting the money supply. Additionally, it impacts the exchange rate, contributing to a stable and predictable economic environment.