By CentralBankNews.info
Nigeria’s central bank left its Monetary Policy Rate (MPR) steady at 14.0 percent and said it was still committed to lowering the rate but right now a “rate cut would worsen the inflationary conditions and undermine the current outlook for stability in the foreign exchange market.”
The Central Bank of Nigeria (CBN), which raised its rate 300 basis points last year to curb inflation, said it expects inflationary pressures to begin to subside as non-oil output recovers and the exchange rate of the naira stabilizes.
But lowering the rate now – a view the CNB described as prevalent in financial markets – would not only worsen demand pressures and undermine existing income from higher inflation, but also make Nigeria unattractive for foreign and domestic investment.
“Given these limitations, the Committee was reluctant to lower the policy rate on this occasion but remained committed to doing so when the conditions permit,” the CBN said.
In December Nigeria’s inflation rate rose for the 11th consecutive month to 18.55 percent from 18.48 percent in November.
The naira has been trading between 317 and 305 to the U.S. dollar in recent months following a plunge of around 35 percent last year. In June 2016 year the central bank removed its 197 peg to the dollar, resulting in an immediate 30 percent drop in its value.
But the naira continued to weaken and authorities introduced several measures to control the exchange rate, with the naira on the black market trading about 40 percent below the official rate and businesses complaining about the lack of foreign exchange.
Nigeria’s Gross Domestic Product expanded by 8.99 percent in the third quarter from the second quarter but on an annual basis the economy shrank for the third quarter in a row.
The economy contracted by an annual 2.24 percent in the third quarter of last year, up from minus 2.06 percent in the second quarter and minus 0.36 percent in the first quarter.
The central bank was bleak in its view of the headwinds facing Nigeria and the global economy, saying it had considered “the implications of the rising wave of nationalist ideologies across the West, the re-evaluation of trade agreements and the possibility of rapid monetary policy normalization in the United States, with adverse consequences for other countries, including Nigeria.”
In addition, it pointed to uncertainties from the U.K.’s decision to withdraw from the European Union and the “apparent retreat from globalization and free trade were also important points of reflection.”
In light of what it described as “the seemingly inevitable structural shift in the global economy,” the CBN reiterated the need for Nigeria to be more inward looking and hasten efforts toward economic diversification to lessen the “chronically import dependent consumption culture,” lack of competitiveness of many sectors and yawning infrastructure gap.
The Central Bank of Nigeria issued the following statement:
External Developments
The uncertainty in the external environment persisted owing to a combination of recent political and economic developments. The key issues include: Brexit, the rising wave of populist and anti-globalization sentiments anchored by emerging bilateralism, divergent monetary policy stance of the advanced central banks and disorderly commodity price movements. With global output growth improving sluggishly, the outlook for 2017 remains unchanged owing to persisting uncertainties in commodity prices and volatility in the financial markets as well as slowing demand in the advanced economies and the emerging markets. The MPC welcomed the modest increase in oil prices following the last OPEC decision to cut output and noted the increase in the policy rate of the US Federal Reserve Bank in December 2016 and the potential implications of that decision for international interest rates and capital flows.
While noting the materiality of the output cut on oil prices, the Committee cautioned that the effect could rapidly wane, given the likelihood of a supply glut from non-OPEC members, low level of global economic activity and weak growth. Emerging markets and developing economies, in particular, have continued to confront strong headwinds such as low commodity prices, rising inflation, currency instability, intractable low aggregate demand and subdued capital flows.
Overall, the Committee noted that whereas improved commodity prices may provide modest tailwinds for resource- dependent economies in 2017, the medium-term outlook continues to be muffled by stagnation and uncertainty in the prospects for global trade, subdued investment and heightened policy uncertainty, especially in some major economies. Nevertheless, the IMF estimates that these constraints would decline; paving way for mild improvements in economic growth from 3.1 per cent in 2016 to 3.4 per cent in 2017. Global inflation commenced a moderate but steady rise on the backdrop of improvements in oil prices and currency depreciation in several emerging
Data released by the National Bureau of Statistics (NBS) in November 2016 showed that the economy contracted further by 2.24 per cent in Q3 2016, having slipped into recession following another contraction in output in Q2,
2016. Although the overall contraction in Q3 was greater than was observed in Q1 and Q2, the non-oil sector grew by 0.03 per cent in Q3, driven mainly by agriculture, which grew by 4.54 per cent. The Committee is of the view that the key undercurrents i.e. scarcity of foreign exchange, low fiscal activity, high energy prices and the accumulation of salary arrears – cannot be directly ameliorated by monetary policy actions. The Committee hopes that the recent increase in oil prices would be complemented by production gains to provide the needed tailwinds to sustainable economic activity. In that regard, the Committee commends the commitment of the fiscal authorities to step up efforts to fill the aggregate demand gap through a speedy resolution of the domestic indebtedness of the federal government to states and local contractors. The Committee believes that doing so will aid the effort towards economic recovery.
Developments in Money and Prices
2016. Likewise growth in net credit to government, at 58.84 per cent, surpassed its programmed target of 47.4 per cent. In effect, all the major monetary aggregates exceeded their programmed provisional benchmarks for fiscal 2016.
The medium term outlook based on available data and forecast of key economic variables indicate a more resilient economy in 2017. Growth is expected to turn positive in fiscal 2017, as prior policy lags converge and the fiscal space becomes more accommodative. In addition, the agricultural sector is expected to play a bigger role in driving growth, given the expansion of the Anchor Borrower Program, as well as other developmental initiatives of the Government. Likewise, the prospects for moderation of price developments appear to be strengthening on the heels of positive developments in the food sub-sector.
The Committee identified the downside risks to this outlook to include the possibility of a slower-than-expected rate of global economic activity, fluctuating oil prices and production shut-ins due to vandalism of oil installations.
The Committee re-assessed the headwinds which confronted the economy in 2016 and the opportunities for recovery in 2017. In particular, the MPC evaluated the implications of the rising wave of nationalistic ideologues across the West, the re-evaluation of trade agreements and the possibility of rapid monetary policy normalization in the United States, with adverse consequences for other countries, including Nigeria. The uncertainties underpinning the implementation of Brexit and the apparent retreat from globalisation and free trade were also important points of reflection.
In recognition of the seemingly inevitable structural shift in the global economy, the Committee reiterated the need to be more inward looking and hasten efforts towards economic diversification to support the domestic economy and improve life for the Nigerian people. Consequently, members acknowledged the imperative of sectoral policies and greater coordination of monetary and fiscal policy.
Central Bank, the Committee stressed that it was not oblivious of the full ramifications of the economic challenges facing the country.
competitiveness of many sectors of the economy and yawning infrastructural gap, have combined with an unfavorable external environment to complicate the macroeconomic policy environment. The Monetary Authority had on many occasions, and to the extent feasible, taken extra-ordinary steps to support other policies as well as compensate for aspects of structural gaps in the economy even at the expense of its core mandate.
The Committee specifically noted the positive contribution of agriculture to GDP in the third quarter, mostly attributable to the Bank’s interventions in the sector. The Committee hopes that given the thrust of the 2017 budget and accompanying sectoral policies, output growth should resume in the short to medium term. The MPC, therefore, lends its voice to efforts for an early finalization of the 2017 Federal Budget by the authorities concerned, and the resolve to pursue a non-oil driven economy, as these will go a long way in stimulating aggregate demand and restoring confidence in the economy. The Committee also urged the authorities to seriously consider using the Public Private Partnership (PPP) model in its infrastructure development programme as a means of cushioning any possible shocks to budgeted revenue.
The Committee further noted that Inflationary pressures would begin to subside as non-oil output recovers and the naira exchange rate stabilizes. Until then, it stressed, a rate cut would worsen the inflationary conditions and undermine the current outlook for stability in the foreign exchange market. The Committee also feels that doing so would further aggravate demand pressures while undermining existing income levels in the face of the already expansionary monetary policy and increasing inflationary pressure which will make the economy unattractive for foreign and domestic investment. Given these limitations, the Committee was reluctant to lower the policy rate on this occasion but remained committed to doing so when the conditions permit.
From a financial stability standpoint, the Committee noted the possible impact of the inclement macroeconomic environment on banking sector resilience. The MPC urged the Management of the Bank to engage industry operators to discuss likely issues of asset quality, credit concentration and high foreign exchange exposures.
Given the growth in money supply arising from unconventional monetary policy operations of the Bank and implications for price and exchange rate
developments, the Committee is committed to moderating growth in narrow money in the 2017 fiscal year in line with the Bank’s monetary growth benchmarks.
The Committee, in consideration of the headwinds in the domestic economy and the uncertainties in the global environment, decided by a unanimous vote to retain the MPR at 14.0 per cent alongside all other policy parameters. In summary, the MPC decided to:
(i) Retain the MPR at 14 per cent;
30.00 per cent; and
(iv) Retain the Asymmetric corridor
at +200 and -500 basis points
around the MPR”
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