The Monetary Policy Committee (MPC) met on March 19 and 20, 2012 with 10 members in attendance to review domestic and international economic and financial conditions with a view to addressing monetary policy challenges in the short-to medium-term.
The International Economic Situation
The outlook of the international economic environment has improved slightly, when compared with 2011. The US economy is showing signs of recovery and is expected to post over 2 per cent growth in 2012 compared with 1.7 per cent in 2011. There are, however, lingering global security concerns, particularly with respect to the face-off between the Iranian authorities on the one hand and the governments of the U.S., Europe and Israel on the other. An escalation of conflict may threaten global energy supplies and introduce shocks into the current environment. The Eurozone countries’ economic outlook remained uncertain, particularly owing to the loss of momentum in growth by the end of 2011. The Eurozone countries posted a negative growth of 0.3 per cent in Q4 compared with gains of 0.2 per cent and 0.1 per cent in the preceding two quarters. The recent estimate indicated that the Euro area may post a negative growth of 0.3 per cent in 2012 against the estimated 1.4 per cent in 2011. The sovereign debt problem of the highly-indebted countries of the Eurozone, however, seems to be coming under control with supportive actions from creditors, in particular the European Central Bank (ECB) and the IMF, which also boosted liquidity and sentiment in the financial markets. The economic prospects of the United Kingdom also seem to have improved recently partly owing to the financial support given by the ECB to the financial markets and partly due to news of the incipient signs of improvement in the economy of the U.S. The changed monetary stance of the ECB has clearly provided the short term support needed to restore confidence and kick-start recovery subject to improvements in fiscal balance sheets and competitiveness in the European periphery.
In emerging economies, there is clear evidence of a slowdown. China posted 8.9 per cent growth in Q4 2011, the lowest since Q2 2009. It is expected that China’s growth will slow down further in the current quarter going by the weak industrial production gains in January and February and the low retail sales. Consequently, China has revised its growth target for 2012 downward from 8.0 per cent to 7.5 per cent. In India, growth in the quarter ending December 2011 was lower at 6.1 per cent compared with 6.9 per cent in the preceding quarter. Inflation rose in February 2012 with the result that inflation in 2011-12 could well be slightly above 7 per cent. However, the latest official estimate of growth for 2012-13 is 7.6 per cent. This is partly attributed to expected improvement in the fiscal position and somewhat relaxed monetary policy. Brazil’s growth in Q4 of 2011 was 2.47 per cent and is expected to slow down further in 2012. For the year as a whole, Brazil recorded a mere 2.7 per cent as against 7.5 per cent in 2010. Inflation was 5.8 per cent in February 2012. The concerns around slowdown in the growth of these leading emerging market economies are however mitigated by the relatively positive outlook in the advanced economies.
The Committee noted that oil prices are likely to be stable in the short-to medium term, with a possibility of volatility induced by any deterioration of peace conditions in the Middle East. The risk of a sharp decline in oil price is significantly lower today than it was at the last MPC. However, there is a need to guard against complacency.
Domestic Economic and Financial Developments
The National Bureau of Statistics (NBS) has revised the data on national accounts for 2010 and 2011. In Quarter 4 of 2011, real GDP grew by a 7.68 per cent, higher than 7.30 per cent in the preceding quarter but lower than the 8.60 per cent of the corresponding quarter of 2010. For the year as a whole, real GDP growth has been lower for all the quarters in 2011 than in the corresponding quarters of 2010. The Committee noted that real non-oil GDP recorded a robust growth of 8.85 per cent in 2011 as against 8.51 per cent in 2010. Crude oil output growth recorded a decline of 0.57 per cent in 2011. In the non-oil sector, agriculture decelerated mildly: its growth was 5.71 per cent in 2011 compared with the growth of 5.82 per cent in 2010. The main contributions to non-oil growth in 2011 where wholesale and retail trade, services, building and construction, and minerals and manufacturing. In general, the negative growth in the oil and gas and slowdown in agriculture are pointers to the need for implementation of the appropriate reforms in the agricultural and petroleum sectors.
The Committee noted the resurgence of inflationary threat starting in January after it had moderated towards the end of 2011. The NBS data on prices shows that the headline inflation in February 2012 stood at 11.9 per cent, lower than 12.6 per cent in January but higher than 10.3 per cent in December 2011. Food inflation on year on year basis was 12.9 per cent in February compared with 13.1 per cent in January and 11.0 per cent in December. The year-on-year core inflation was high at 13.5 per cent in February relative to 12.7 per cent in January and 10.8 per cent in December. The moderation in food inflation has helped to lower headline inflation. The rise in core inflation, however, must be kept in view in the formation of inflationary expectations. Given the partial removal of fuel subsidy in January the moderation in inflation in February is probably attributable to a number of variables including: reallocation of spending by consumers due to higher expenditure on transport and fuel; the slowdown in monetary aggregates and fiscal spending; the stable and strengthening exchange rate of the naira; seasonal effect of food prices and statistical base effects.
Monetary, Credit and Financial Market Developments
The provisional data on broad money supply (M2) for February shows that it grew by 13.4 per cent on year on year basis compared with 15.4 per cent in 2011. M1 grew at a faster pace of 19.1 per cent on year on year basis mainly owing to the strong growth of demand deposits. However, relative to December 2011 levels, both broad money (M2) and narrow money (M1) declined. Foreign assets (net) and domestic credit (net) both increased on year-on-year basis. However, over the December level, net foreign assets grew modestly by 1.15 per cent whereas the domestic credit declined by 1.9 per cent. The Committee urged the Central Bank of Nigeria to monitor closely the credit developments and ensure that the private sector gets adequate credit from deposit money banks so that the current growth momentum is not impeded by lack of adequate finance.
The Committee noted that money market rates have been moving around the upper limit of the corridor. The average OBB rate was 13.91 per cent in January and 13.64 per cent in February. The average call rates in January and February months were 14.18 per cent and 14.29 per cent, respectively. The overall stability in the money market rates was essentially a reflection of the effectiveness of monetary policy implementation. The spread between the average maximum lending rates and the weighted average rate on all categories of deposits fell marginally from 20.12 percentage points in December 2011 to 19.94 percentage points in January and further to 19.70 percentage points in February 2012.
External Sector Developments
Foreign exchange reserves amounted to US$35.43 billion as at March 14, 2012. This is an improvement over the level of US$ 32.64 billion at end-December 2011. The exchange rate at the wDAS auctions moved from US$/N158.6205 at the end of January 2012 to US$/N157.6206 as on March 14, 2012. This partly reflected the moderation in the demand for foreign exchange due to increased inflows and reduced demand. The exchange rate at the inter-bank market appreciated significantly from US$/N161.60 as at end January to US$/N157.70 as at March 14, 2012. The rate charged by BDCs also appreciated from US$/N163.00 to US$/N160.00 during the same period. As a result, the premium between the wDAS rate and the rates in the other segments of the market declined substantially over the period.
The Committee held the view that the improvement in the inflow of foreign exchange partly owing to the current high crude oil prices in the international markets and the general improvement in the policy environment to attract capital flows influenced the observed trends in the external sector. It urged the Central Bank of Nigeria to build up adequate external reserves to satisfy the genuine needs for foreign exchange consistent with the increase in the growth in economic activity and the need to conserve resources and to withstand external shocks.
The Committee’s Considerations
The Committee noted that the underlying inflationary pressure from supply shocks would have been more severe had there been no mitigating factors on the demand side. Currently, aggregate credit and broad money (M2) have been on the decline and there are signs of improving fiscal position with some control over expenditure and no imminent increase in wages. The fiscal stance and the absence of second-round effects of fuel subsidy removal have therefore complemented the monetary stance to dampen demand. The situation is further supported by stable exchange rates and stable international commodity prices which combine to moderate imported inflation.
The Committee recognized that in light of increasingly benign global environment, it is imperative to ensure that the current growth path is sustained. It noted the relative stability in the foreign exchange market as well as the modest accretion to external reserves during the period. In view of the poor accretion to reserves in 2011 and the need to continue to build buffers for the economy in an uncertain environment, the Committee strongly endorsed the stance of the Bank to focus on building reserves, defending the stability of the currency and providing conditions that are conducive to the inflow of FDI.
The Committee noted with satisfaction the introduction of some fiscal and structural measures that could improve the revenue base of the government as well as enhance the capacity of the domestic economy to improve the value chain in the production process. Some of these measures include introduction of cost reflective electricity tariffs and progress in agricultural transformation initiatives. Although these measures would have a salutary effect on the fiscal position, they may, in the short run, put pressure on domestic prices. Consequently, it is important for both monetary and fiscal authorities to put in place coordinated measures that would moderate the increase in the general level of domestic prices in the short to medium term. The Committee is also concerned about the rising level of domestic debt and its sustainability, as shown by the average debt service to revenue ratio of 17.6 per cent in the last three years. This would likely have a negative impact on domestic interest rates and the flow of credit to the core private sector, among others. Although debt to GDP ratio in 2011 stood 17.8 per cent the Committee noted that the percentage of debt service to government revenue was a high 19.1 per cent in the same year. In view of the high interest rate environment occasion by tight monetary policy stance, a moderation in government borrowing would be positive not just for the fiscal position but for access to finance by the private sector. After reviewing the overall fiscal position the committee commended the fiscal authorities for the discipline being introduced into government spending, the tightening of fiscal controls and the renewed focus on spending on capital projects.
In arriving at its decision, the Committee was faced with a choice between two options. One option was to consider, in view of the improving global economic environment, a moderation in headline inflation, slowdown in monetary aggregates and fiscal spending and the crowding out effects of high interest rates, a reduction in the policy rate. This argument was considered but rejected on the basis of a number of factors. These included persistent underlying core inflationary pressures, the need to continue supporting the naira and build up external reserves, the necessity for attracting and retaining foreign investment and the need for consistency and stability in the macroeconomic environment. The Bank also needs to maintain its clear focus on price stability and it is not evident that a moderation in February is sufficient to establish a trend, and warrant a reversal of monetary tightening.
In the light of the above, and considering the clear impact of previous tightening on the rate of inflation and exchange rates up to February 2012, the Committee unanimously decided as follows:
- Retain MPR at 12.0 per cent with interest rate corridor of +/- 200 basis points;
- Retain CRR at 8.0 per cent;
- Retain minimum liquidity Ratio of 30.0 per cent; and
The Committee also resolved to watch closely developments with respect to the fiscal stance and to respond appropriately if, and when, the need arises.
Sanusi Lamido Sanusi, CON
Central Bank of Nigeria
March 20, 2012
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