THE Central Bank of Nigeria’s (CBN’s) for the second time since September 2010 announced an increase in deposit rate by a quarter of a percentage point to 6.5 per cent. Among other monetary policy guidelines prescribed by the CBN include a jack up of lending rate by the same margin and moving up of reserve requirements from one per cent to two per cent. The strategic objectives of this policy include the need to encourage savings, curb inflation and maintain stability of the banking system. The primary aim of the policy is to foster stable macroeconomy and economic growth through control of money supply and inflation thus protecting the value of Naira.

IN terms of transmission mechanism, strategic interest rates manipulation should work to stabilise the economy through an unforced withdrawal of money from circulation. In an ideal model a change in interest rate by the Central Bank is expected to reduce the propensity to hold cash by making prices of financial market instruments more attractive and encourage investment. The strategic withdrawal is expected to cut down the propensity to consume and increase the propensity to save. The expectation from this is to make loanable fund available for investors through savings, develop the real sector and finally promote employment, capacity to earn income and welfare. Reduced propensity to demand for cash and strengthening of the real sector is also expected to affect exchange rates of Naira to other currencies around the world. The combination of these factors is expected to move price level downward thus controlling inflation.

IN line with the above, the governor of the apex bank pointed out that the monetary policy measures taken by the bank were aimed at protecting the real income of the poor people who are particularly hurt by inflation. It is important to commend the Central Bank of Nigeria for its regular efforts to initiate policies aimed at stabilising the economy and repositioning it on the path of growth. For instance, the CBN made significant policy contribution to making the economy to attain the growth rate of about 8.7 per cent recorded during the last quarter of 2010. A question to ask, however, is whether the growth recorded has actually translated into any meaningful improvement in quality of life for the majority of Nigerians, especially the masses. The CBN seems to be moving away from the reality of the Nigerian economy where far more than half of the population are poor going the revised poverty line threshold.

IN economic principle, income is shared between consumption and savings, and going by economic calculations the combination should be equal to one. However, the propensity to consume in Nigeria seems greater than one, meaning that take home income for many Nigerians never actually take them home. Many in working age bracket in Nigeria are unemployed, many are living on informal social protections, thus earning no income not to consider savings. The achievement of the CBN’s objective may, therefore, be a fluke in an environment like Nigeria where the majority are too poor to respond to incentive to increase savings offered by the new interest deposit rate policy. A majority of the poor do not unwillingly use the banking system given the struggle they undergo to make end meet with their meagre incomes, and thus no room for savings. It must be realised that income must be earned and satisfy basic livelihood before saving becomes rational. It can, therefore, be said that raising the interest rate to increase savings, lower inflation and protect the poor may be a “mis-targeted” ambition.