Impact of Monetary Policies
Mechanisms Affecting Monetary Policy
Monetary value can affect the level of investment in a country. Monetary policy works by creating influence on the economys demand and a low influence on supply. This policy determines the money value of goods and services. Central bank has the power to determine a specific interest rate in the financial market as it is the only bank that supplies base money. The central bank in England operates the same as all other banks in other countries although the details in the banks structure may differ depending on the country. The central bank plays the role of choosing the prices it will lend to institutions in the private sector. Banks in UK use the official rate. Nigerias central bank is said to operate the same as Englands and it also uses the official rate. Interest rates are said to be of two types, short term and long-term. Change in short term interest rates can be transmitted to other financial market rates and other rates which are considered to be short term like interbank deposits. When Nigerias official rate changes, it makes the other banks in the country to adjust their lending rates by an equal amount to the policy changes. This has an impact on the interest rates that the countrys banks charge their customers for loans and overdrafts. The same rise of rates causes rates on mortgages to go up or down. This same effect is also transmitted to people who have banked their savings.
Long term interest rates are also affected by monetary policy whereby a rise in official rate can lead to low expectations in future interest rates. All these effects lead to banks in the country offering little funds to their customers causing the country to be unable to invest in its oil plants. The rise of interest rates affects firms and people in the country in several ways. For example, the rise in rates reduces companies profits and leads to a decrease in the capital that firms require for new investments and this will make it difficult for the country to start new projects. The rise in interest rates will also affect the financial cost the country needs to hold its inventories as this cost is financed through bank loans. The high interest cost will also make it hard for oil plants to hire employees they will instead have to employ new methods like reducing employment opportunities and maybe hours worked. Low interest rates are an advantage to firms as they enable firms to hire more employees, be able to finance projects in new plants and buy equipment cheaply. High interest costs also affect the countrys citizen thus forcing them to reduce on their spending.
Monetary policy also affects the exchange rate. Exchange rate is said to be the relation between the price of domestic and foreign money and it depends on monetary conditions from domestic prices and foreign prices. A rise in the official rate makes the domestic currency to appreciate in foreign exchange markets and a fall in the official rate makes the domestic currency to depreciate. The fall in the exchange rate is due to Nigerias interest rates being higher compared to interest rates on foreign currency assets. This makes the Nigerian currency to be more attractive to investors from foreign countries. Increase in the exchange rate causes the countrys population to change from using goods produced in their own country to buying goods from foreign countries. This results in the countrys oil plant to have little demand for its products leading to poor sales or profits or the country being unable to invest in new plants. (Smal, 2001).
The country can also experience shock from the bank lending channel when the central bank limits the amount of funds it releases to fund the country. Bank lending channels operates when there is improper information between the bank and the suppliers of the capital needed. Due to this improper information, banks are unable to compensate the decrease of deposits which comes as a result of the tightening of the monetary policy with other sources of money. This leads to a low supply of capital thus making the country unable to invest in its oil plant. This lack of investment causes a low supply of oil in the country or causes plants to close down. The oil companies are forced to make their prices high creating inconveniences to the citizens thus the citizens are forced to look for other sources of energy.
Asset price mechanism can be another source of problem to the government as it affects the countrys prices on bonds and shares in the countrys stock exchange. Changes in the official rate will affect the market value of securities like bonds and equities. When it comes to bonds, their prices are said to be inversely related to the long term interest rate. A rise in long-term interest rates makes the prices of bonds to go down and a low interest rate makes the prices of bonds to rise. If all other things are held constant (expectation on inflation), higher interest rates are said to lower the prices of equities. Higher rates will also have an impact on the people in the country because they lower the value of assets and this leads to low wealth among people in the country. This causes people to reduce their spending so as to cater for the price increase. The high rates will also increase the cost of purchasing houses and make the housing sector to have low demand. The oil companies in the country will not be able to invest because they have to pay more so as to get housing for their businesses. People in the country will become poor due to high costs in housing and they will also reduce on borrowing. (Kuttner, 2002)
A balance sheet is used to balance the financial information of the country. This includes credits and asset values. It is important as it determines the countrys economic growth. If a country has a well balanced sheet then it will have a good economic growth as it shows its interest rate to be low. Central bank maintains a balance sheet of all the money it has given out. This sheet is used to monitor the amount the bank has given to the country. (Kuttner, 2002)
When the countrys policy on interest rates changes, it can cause influence in the expectations and confidence people have on the growth of the economy. These changes mostly affect people who are in the finance market and other sectors of the economy. This includes changes in expected future labour income, cases of unemployement, sales and profits. An increase in rate could be interpreted as a sign of growth in the economy. This will make the expectations people have about the growth of the economy high and positive. People will also have more confidence. This will enable more oil firms to invest. An increase in rate can also be interpreted as a signal that the countrys economy needs slow growth so as to hit the inflation target. This interpretation will make people have low expectation about the future growth of the economy and low confidence. This will make the firms to have little investments or no investments at all hence losses to the company. The countrys population will also have to reduce their spending power due to a low supply of oil products. (Kuttner, 2002)
Financial Crisis Effect
The financial crisis of the year 2007 and 2008 has been transmitted into the energy sector through a number of transmission mechanisms. This includes high prices on goods, problems in financing investments and flow of remittance. The crisis is as a result of lack of enough regulations in the banks and other financing bodies. This crisis has faced both developed and underdeveloped countries.
This crisis has caused a reduction in the amount of goods exporters and manufactures are allowed to export or manufacture hence a big disadvantage to oil exporting countries. The crisis has also caused energy prices to go down which is a disadvantage to countries producing oil because they have low sales which make them to have limited investments. The countries importing oil have an advantage as they have increased their demand due to low prices. It has also affected the exchange rate of developing countries as currency positions in many countries have been reversed. The crisis has also caused investors in developing countries to withdraw their efforts making the underdeveloped countries to have limited capital for their investments. This has led to many firms closing down or experiencing low production.
Wind Energy
Renewable energy sources have been viewed as the alternative sources of energy by countries that dont have enough investments in crude oil. This is because they are cheap compared to the cost of oil in a country facing limited supply and the country can finance them on their own without asking for help from external sources. This has made these energy sources not prone to monetary policy impact crude oil. Energy sources like wind have an advantage in that they try to reduce global warming which is as a result of producing or releasing carbon dioxide into the air. Mining places release large amounts of carbon dioxide into the air thus causing global warming which affects a countrys environment. Countries should look for other sources of energy apart from crude oil and electricity. Sources like wind affects the surrounding community due to the noises produced. Being an international company does not guarantee one to invalidate the monetary policy for the company. This is because all companies are considered equal by the central bank when it comes to financial policy and the companies are said to have fixed and tight rates on the exchange of money. The monetary policy does not allow any country to have dominant leadership in money transfer. This is to reduce the effect of financial crisis that can be brought about by one country being the leader. Monetary policy allows all countries to have an equal chance of making decisions concerning policing and all policies are implemented fairly to ensure all developed and undeveloped countries have money for development. The financial crisis experienced in 200708 was partly because of some countries dominating the market and causing inconveniences as the countries provided financial aid to developing countries.
Conclusion
So for Nigerias investments to be successful, it should have its monetary policy well regulated as this can affect the countrys economy negatively or positively. A good monetary policy will enable the country to have enough supply to meet the citizens demand. The interest rate being the biggest channel through which monetary policy influences a countrys economy and other rates it should be kept low so that the country can have high investment and employment.