Full Project on Impact of Monetary Policy Rate on Investment in Nigeria

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                                                                                               CHAPTER ONE

                                                                                              INTRODUCTION

1.1       Background to the Study

In Nigeria, governments formulate policies and guidelines with a view to boosting the level of investment while keeping inflation at a minimal level so as to spur economic growth and development. This is why the Central Bank is charged with the task of implementing the monetary policies of the government. Since its establishment in 1958, the objectives of the Central Bank of Nigeria have remained broadly the same, but the strategies for achieving these objectives
have changed in consonance with the varying legal, institutional and macroeconomic environments.

Over the years, the objective of monetary policy had been the attainment of internal and external economic balance. However, emphases on techniques/instruments to achieve those objectives have changed over the years (Adam, 2004). Of the variables of monetary policies (Open Market Operation, Cash Reserve ratio, Monetary Policy rate, selective credit controls, exchange rate, etc) in recent times, focus has always been on the Monetary Policy Rate (MPR) as it is what
determines the lending rates all over the country and this has a very crucial effect on the participation of all economic agents towards the contribution to the economic growth and development of the country through their level of
participation in investment activities in the country.

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity (Economic Times, 2019). The rate at which the Central bank lends money to the commercial banks and other recognised entities is therefore known as the Monetary Policy rate and this is the rate that affects the level of private participation in investment activities in the country. Monetary Policy Rate (MPR) is a monetary policy instrument used to effect changes in the availability of credit supply in order to stimulate economic growth, price stability and high employment level. In other words, it serves as a monetary policy tool considered as the main policy instrument in effecting the tempo of economic activities in any economy.

Through its monetary policy, a central bank can affect the demand in the economy, butit has no power to affect the supply (ET Bureau, 2013). When growth falls, the central bank may reduce the policy rates. As this monetary signal works its way through the economy, the rates for all sorts of loans fall. This stimulates the demand and helps the economy return to its potential growth rate. Sometimes the growth rate is too high, pushing up inflation. The economy is said to be overheating,
which means that it is growing at a rate faster than its potential, and this is causing the prices (of inputs, like wages and commodities) to rise. The central bank may then raise the interest rate. By trying to reduce demand within the
economy, it tries to bring about a ‘soft landing’. This means that it tries to slow down the growth rate to the economy’s potential rate. If allowed to grow unhindered, the economy could suffer a ‘hard landing’ (its growth rate may fall much below its potential). 

The Monetary Committee is used by the Central Bank Rate in Nigeria to set the minimum rate on which investors can borrow. This in effect leads to a similar change in the prevailing lending rates. For example, the Central Bank of Nigeria through its Monetary Committee evoked this measure when the inflation was believed to be too high. It raised the MPR rate from 11% to 18% which saw the interest rates increase to above 24%. This explains the relationship
between MPR and the prevailing lending rates (Beki, Aliyu, Saidu, Sheu & Zubair, 2017). In the year 2012, the Central Bank reduced the MPR from 18 to 13% which subsequently saw the lending rates charged by commercial banks reduce
from 24% to 18%. Interest rates therefore affect the cost of borrowing and ultimately changes the level of investment in the country. This leads to the next concept of study which is the term- Investment.

Ali and Mshelia (2007) observed that investment is the most strategic factor influencing growth in any country. It is characterized as the main key to increased level of productivity and economic growth. A strong correlation between investment and economic growth has been revealed by both theoretical and empirical studies by development economists of the world (Adofu, 2010). Similarly, Muhammad and Mohammed (2004) noted that investment plays a very important and positive role for progress and prosperity of any country. Many countries rely on investment to solve their economic problem such as poverty, unemployment, etc. Development economics in offering insights into the determinants of growth affirmed that the importance and role of investment cannot be overemphasized as it contributes meaningfully to economic growth (Nnanna, Englama & Odoko, 2004).

 

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