Monetary policy committee metrics explained

In this article, we discussed specific economic metrics that are adjusted by the monetary policy committee during their bi-monthly meeting. These metrics include MPR, asymmetric corridor, cash reserve ratio, and liquidity ratio.

1. Monetary policy rate

Monetary policy rate is the market rate in which the central bank lends to the commercial bank. If a money deposit bank is short of funds it can borrow from the CBN. The rate is used by those banks to decide the amount they lend to their client. A higher MPR means bank customers should be unwilling to borrow while a lower one will increase borrowing and of course money supply.

2. Asymmetric corridor

This is used to decide the rate the central bank will lend to commercial banks and the interest rate that will be provided for their deposit to the Bank. What this implies is that the apex bank gives loans to commercial banks at a particular MPR rate. Also, when banks deposit money to the Central Bank, they are also paid interest rate on the deposits.

The reserve bank can decide to increase borrowing of the deposit bank and reduce deposits and vice versa. A +300/-200 basis points for asymmetric corridor at an MPR of 24% implies that the apex bank will lend to commercial banks at 27% (24% - 300bps) and provide interest rate on deposit at 22% (24% - 200bps). This implies that the central bank wants commercial banks to reduce lending to their customers and at the same time deposit more to them at a good interest rate. 

3. Cash reserve ratio

This is a rate that limits the amount of customers' deposits liabilities a bank must leave at its vault. Thereby avoiding the use of all customer deposits for lending. A higher rate will reduce the amount of credit available to loan customers and vice versa. The implementation reduces or increases money supply.

4. Liquidity ratio

This is the rate that a bank must hold as its cash and cash equivalent at any point in time. This includes cash at vault, cash at bank, treasury bills, and other short term securities. The ratio also determines the amount of credit available as loan and overdraft to banks customers. A higher liquidity ratio will reduce the amount of money available for loans to customers while a lower rate will increase it. This will reduce and increase the money supply respectively.