By CentralBankNews.info
Nigeria’s central bank kept its monetary policy rate at 14.0 percent but switched to a tightening bias by saying that a rate cut now would worsen the naira’s exchange rate, further pull the real interest rate into negative territory, reverse the positive outlook for the current account and not necessarily transmit into lower lending rates by banks.
The Central Bank of Nigeria, which in January said it was committed to lowering its policy rate, said its monetary policy committee had debated loosening its policy stance to help stimulate demand and confidence but decided against this due to the upward trend in inflation and the impact from such an easing on the exchange rate.
“The Committee, in consideration of the headwinds in the domestic economy and the uncertainties in the global environment, decided by 9 out of 10 members to retain the MPR at 14.0 percent,” the CBN said, adding one committee member had voted to raise the rate.
Among the global uncertainties facing Nigeria are “the unfolding protectionist posture of the United States and some European countries,” sustenance of the OPEC-Russian agreement to cut oil output beyond July 2017, sluggish global recovery and a stronger U.S. dollar.
Despite a drop in Nigeria’s headline inflation rate to 17.78 percent in February – the first decline since January 2016 – the central bank said food prices had still risen and there were still structural factors putting pressure on consumer prices, such as high cost of power and energy, transport and production and the rising cost of imports.
However, the CBN said it was optimistic that its policy stance along with other measures to improve the agricultural sector would help restart growth and drive down prices.
Nigeria’s economy has been in recession since the second quarter of 2016, with Gross Domestic Product contracting by 1.51 percent last year although the rate of annual contraction in the fourth quarter of last year improved to only 1.3 percent from 2.24 percent in the third quarter.
The government’s Economic Recovery and Growth Plan, along with efforts to restore peace in the Niger Delta region, should help revive growth and stabilize prices, the CBN said.
The official exchange rate of Nigeria’s naira has been largely unchanged since August last year, trading in a range between 317 and the official rate of 305 to the U.S. dollar. In June the CBN removed its naira peg of 197 to the dollar, resulting in an immediate 30 percent drop in its value.
In response, 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.
There is frequent speculation in Nigeria that authorities will liberalize the foreign exchange market but the central bank has so far resisted these pressures, noting the sharp rise in inflation following Egypt’s decision to float its pound.
However, investors and economist still expect the CBN to take measures to narrow the gap between the black market and official rates, and in recent weeks the central bank has offered private individual U.S. dollars at a rate of 366 compared with the official rate of 305 to provide direct funding to meet the needs for travel, medicine and school fees.
The Central Bank of Nigeria issued the following statement:
The Monetary Policy Committee met on the 20th and 21st of March, 2017, against the backdrop of persistent uncertainty in the global economy, stemming from economic and socio-political developments around the world. On the domestic front, while the Q4 2016 GDP figure was better than the last two consecutive quarters, the economy remained in recession with inflationary pressures continuing unabated. These adverse external and domestic conditions continued to complicate the policy environment.
In attendance at the meeting were 10 members of the Committee. The Committee assessed the global and domestic economic and financial environments in Q1 2017 as well as the outlook for the medium-term.
The global economy witnessed greater momentum in Q4 2016, facilitated by gains in both developed, emerging markets and developing economies which propelled global GDP growth to 2.7 per cent year-on-year in Q4, 2016, a 0.2 percentage point improvement over Q3 2016.
In spite of this improvement, the external environment continued to be plagued by political, economic and financial market uncertainties, with the defining issues being: Brexit, growing protectionist and anti-globalization sentiments, divergent monetary policies of the advanced economies’ central banks and volatile commodity price movements. The protectionist stance of the new U.S. administration could impact negatively on global trade and economic recovery.
Overall, the Committee noted the dampening effects of economic stagnation and uncertainty on global trade and investment. In spite of these constraints, however, the IMF estimates that the global economy would witness a slight improvement in growth from 3.1 per cent in 2016 to 3.4 per cent in 2017.
Global inflation continued its moderate but steady rise against the backdrop of improved oil prices and depreciated currencies in several emerging markets. Amongst the major advanced economies, the U.S Fed maintained its tightening stance, with a further upward adjustment1 in March 2017. Meanwhile the Bank of Japan (BOJ), Bank of England and the European Central Bank, maintained the soft policy stance at their most recent meetings.
Data released by the National Bureau of Statistics (NBS) in February 2017 showed that the economy contracted marginally by 1.30 per cent in Q4 2016, effectively remaining in recession since Q2 2016. Overall, in 2016, the economy contracted by 1.51 per cent, with the contraction in Q4 being the least since Q2 2016. The non-oil sector grew by 0.33 per cent in Q4, largely reflecting the slowdown in the agricultural sector, which decelerated to 4. 03 per cent in Q4 2016 from the 4.54 per cent recorded in Q3 2016. The Committee remains of the conviction that fiscal policy remained the most potent panacea to most of the key negative undercurrents i.e. stunted economic activity, heightened unemployment and high inflation.
In spite of the recent moderate recovery in oil prices, the
Committee approached developments in commodity prices cautiously. It noted that the era of high oil prices was over, thus making diversification away from oil more imperative today than ever.
The committee noted that money supply (M2) contracted by 5.73 per cent in February 2017, annualized at -34.38 per cent in contrast to the provisional growth benchmark of 10.29 per cent for 2017. Similarly, Net Domestic Credit (NDC) contracted by 1.41 per cent in February, 2017, annualized to 8.46 per cent, being significantly below the 17.93 per cent provisional growth benchmark for 2017. Likewise, net credit to government contracted at an annualized rate of 49.74 per cent, representing 82.86 per cent below its programmed target of 33.12 per cent. In effect, all the
major monetary aggregates contracted by end-February and underperformed their programmed provisional benchmarks for fiscal 2017.
The Committee, similarly, observed a continuous upward
trend in the month-on-month inflation rate in February,having slightly moderated between December 2016 and January, 2017. It noted the sustenance of the structural factors mounting pressures on consumer prices, such as the high cost of power and energy, transport and production factors, as well as rising prices of imports. Nonetheless, the Committee remains optimistic that the adopted policy stance and other ancillary measures directed at improving the agricultural and other relevant sectors of the economy would combine to restart growth and drive down prices in the short to medium-term.
inter-bank call rate rose to 100.00 and 133.84 per cent on January 21 and January 23, 2017, respectively, following the withdrawal of liquidity from the banking system through the sale of foreign exchange worth N137.00 billion on February 21, 2017.
Total foreign exchange inflows through the CBN decreased
by 8.87 per cent in February, 2017 compared with the previous month, as foreign exchange market receipts were significantly lower. Total outflows, also declined by 7.32 per cent during the same period. The Committee noted that the average naira exchange rate remained stable at the inter- bank segment of the foreign exchange market in the review period.
Available data and forecasts of key economic variables as well as the newly released Federal Government’s Economic Recovery and Growth Plan (ERGP), indicate prospects of output recovery in 2017. The Committee expects that the implementation of this plan, the new foreign exchange policy as well as the current effort by the Federal Government to restore peace in the Niger Delta region
would help revive economic growth and stabilize prices.
3.0. The Considerations of the Committee
The Committee re-evaluated the implications for Nigeria of the continuing global uncertainties as reflected in the unfolding protectionist posture of the United States and some European countries; sustenance of the OPEC-Russian agreement to cut oil production beyond July 2017; sluggish global recovery and the strengthening U.S. dollar.
The Committee also evaluated other challenges
confronting the domestic economy and the opportunities
for achieving price stability, conducive to growth in 2017. In particular, the Committee noted the persisting inflationary pressures; continuing output contraction; high unemployment rate; elevated demand pressure in the foreign exchange market; low credit to the real sector and weakening financial system indicators, amongst others. Nonetheless, members welcomed the improved implementation of the foreign exchange policy that resulted in naira’s recent appreciation. Similarly, the Committee expressed satisfaction on the release of the Economic Recovery and Growth Plan, and urged its speedy implementation with clear timelines and deliverables. On the strength of these developments, the Committee felt inclined to maintain a hold on all policy parameters. Nevertheless, the Committee noted the arguments for tightening policy which remained strong and persuasive. These include: the real policy rate which remains negative, upper reference band for inflation remains substantially breached and elevated demand pressure in the foreign exchange market. The reality of sustained pressures on prices (consumer prices and the naira exchange rate) cannot be ignored, given the Bank’s primary mandate of price stability. It noted that the moderation in inflation in February was due to base effect as other parameters, particularly; month-on-month CPI continued to rise. However, tightening at this time would portray the Bank as being insensitive to growth. Also, the deposit money banks may easily reprice their assets which would undermine financial stability. Besides, the Committee noted the need to create binding restrictions on growth in narrow money and structural liquidity and the imperative of macroeconomic stability to achieving price stability conducive to growth.
4.0. The Committee’s Decisions
The Committee, in consideration of the headwinds in the domestic economy and the uncertainties in the global environment, decided by 9 out of 10 members to retain the MPR at 14.0 per cent alongside all other policy parameters. One member voted to raise the MPR. In summary, the MPC decided to:
(i) Retain the MPR at 14 per cent;
(ii) Retain the CRR at 22.5 per cent;
(iv) Retain the Asymmetric corridor at +200 and -500
basis points around the MPR
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria“
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