By CentralBankNews.info
Nigeria’s central bank left its monetary policy rate (MPR) at 14.0 percent, as expected, saying a loosening of policy now would boost growth and demand but also aggravate the upward trend in consumer prices and generate pressure on the exchange rate, ultimately leading to a deterioration in the current account balance though higher imports.
The Central Bank of Nigeria (CBN), which has maintained its rate since raising it by 200 basis points in July 2016, added that its monetary policy committee voted by 8-1 to keep the rate steady, with one member voting to cut the rate by 100 basis points.
At its previous meeting in September, 6 members of the policy committee voted to retain the rate while one member also voted to lower it.
The decision to maintain the rate was expected and comes after the central bank’s governor, Godwin Emefiele, earlier this month said he was optimistic there would be an easing of monetary policy if the pace of disinflation is adequate and inflation reaches predicted levels.
Nigeria’s inflation rate fell for the ninth consecutive month to 15.9 percent in October from 15.98 percent in September, helped by a relatively stable naira and a contraction in money supply. This year inflation hit a high of 18.72 percent in January and has been falling ever since.
During its two-day meeting, the bank’s monetary committee also discussed raising the key rate as this would strengthen the impact of its policy on inflation, along with capital inflows and exchange rate stability, but it would also dampen the positive outlook for growth and financial stability.
The argument to maintain the rate won the day, with the committee saying economic variables have continued to evolve in line with its current stance and should be allowed to fully manifest but economic output and inflation in particular “required effective close monitoring in order to gain clarity on the medium optimal path of monetary policy.”
After suffering the worst economic slump in 25 years in 2016, Nigeria’s economy is starting to recover, with inflation trending downward and the exchange rate of the naira stabilizing.
Gross Domestic Product grew by an annual rate of 1.4 percent in the second quarter, up from 0.72 percent in the first quarter as the country pulls out a 1.6 percent contraction in 2016.
The International Monetary Fund has forecast 2017 growth of 0.8 percent and 1.9 percent next year as the output of oil, Nigeria’s largest export, rises and results in more available foreign currency, which then allows factories and other businesses import goods.
Nigeria has been suffering from a shortage of U.S. dollars since the fall in crude oil prices in 2014 but has slowly been easing some of the restrictions and capital controls that were imposed in 2015 to shore up the naira’s exchange rate.
The central bank operates a series of exchange rates in addition to the official rate. Last week the central bank sold U.S. dollars at 306 naira but for investors the naira is still quoted around 360 per dollar.
The Central Bank of Nigeria issued the following statement:
The Monetary Policy Committee met on the 20th and 21st of November, 2017 against the backdrop of a relatively optimistic global economic outlook. The Committee reviewed key developments in the global and domestic economies during the first ten months of 2017 and assessed the risks to price and financial stability in the short- to-medium term as well as outlook for the first half of 2018.
Nine (9) members of the MPC were present at the meeting.
External Developments
Global output is projected to improve to 3.6 per cent in 2017 from 3.2 per cent in 2016. The revised growth forecast reflects the uptick in global economic activity, strengthened by the recovery in oil and other commodity prices and leading to improved aggregate demand. Growth in the advanced economies is projected to improve to 2.2 per cent in 2017 from 1.7 per cent in 2016. Similarly, emerging markets and developing economies are forecast to grow at 4.6 per cent in 2017 up from 4.3 per cent in 2016. The MPC, however, noted some risks to the outlook for global growth to include: continued tension in the Korean Peninsula, complexities arising from the BREXIT negotiations and financial market uncertainties due to monetary policy normalization in the US.
Domestic Output Developments
Data from the National Bureau of Statistics (NBS) indicate that real Gross Domestic Product (GDP) grew by 1.40 per cent in the third quarter of 2017, up from 0.72 per cent, and contraction of 0.91 per cent in the second and first quarter of 2017, respectively. The major drivers of real GDP growth were agriculture (0.88%) and industry (1.83%). Some subsectors contracted, including: construction (0.01%), trade (0.29%) and services (1.02%). Overall, non-oil real GDP contracted by 0.76 per cent in Q3 2017, giving credence to the argument that more work is required to consolidate the recovery process; by putting in place policies that will boost growth through the non-oil sector.
Developments in Money and Prices
The Committee noted that money supply (M2) contracted by 5.54 per cent in October 2017 (annualised), in contrast to the provisional growth benchmark of 10.29 per cent for 2017. The development in M2 is largely due to the contraction of 37.50 per cent in other assets net (OAN). Similarly, M1 contracted by 7.79 per cent (annualised to -9.35 per cent). Net domestic credit (NDC) expanded by 1.18 per cent, annualized to 1.42 per cent, driven primarily by net credit to government, which also expanded by 7.60 per cent against the programmed growth of 33.12 per cent. Credit to the private sector, however, contracted by 0.24 per cent in October 2017, compared with the provisional benchmark of 14.88 per cent. The MPC also noted the structural constraints in the transmission of credit to the real sector of the economy as well as the rising unemployment level. The Committee urged the Management of the Bank to continue to encourage the deposit money banks to accelerate the rate of credit growth to the real sector of the economy.
Money market interest rates oscillated in tandem with the level of liquidity in the banking system as the average inter-bank call rate, which opened at 12.00 per cent on October 3, 2017, closed at 5.38 per cent on November 16, 2017. The OBB rates opened at 10.41 per cent and closed lower at 6.02 per cent in the same period. However, the average inter-bank call and OBB rates for the period stood at 10.94 and 10.15 per cent, respectively. The development in net liquidity positions and flows reflected the effects of Federation Account payments to states and local governments; remittances by the Nigerian Customs, Federal Inland Revenue Services; OMO sales; foreign exchange interventions and maturing CBN Bills.
Total foreign exchange inflow through the central bank declined by 6.61 per cent in October 2017, compared with the previous month and attributable to the decline in crude oil and gas receipts as well as revenues from petroleum profit tax (PPT) and royalty payments. Total outflows, however, increased by 18.77 per cent during the same period, as a result of interbank sales, direct payments and JVC calls.
2.0. Overall Outlook and Risks
Forecasts of key macroeconomic variables indicate a positive outlook for the economy up to Q1 2018. This is predicated on continued implementation of the 2017 budget into early 2018, anticipated improvements in government revenue from the implementation of the Voluntary Asset and Income Declaration Scheme (VAIDS) as well as favourable crude oil prices. The development finance initiatives by the CBN in the real sector, particularly in agriculture, are expected to continue to yield positive results in terms of output expansion and job creation. Focusing on the downside risks to the outlook, the Committee noted the low fiscal buffers and weak aggregate domestic demand. On the external front, widening global imbalances, and rising geo-political tensions were some of the crucial risks identified.
The Committee noted with satisfaction the second consecutive quarterly growth in real GDP following five quarters of contraction. In addition, Members welcomed the relative stability in the exchange rate, particularly the narrowing premia and the very slow deceleration in consumer price inflation, largely attributable to base effects. Overall, the economy has begun to show strong signs of recovery as public investment has picked up with increased housing construction at the Federal and state levels, as well as shipping activities at the ports. The Committee was, however, of the view that policy makers must not relent in their aggressive policy initiatives aimed at continuing the positive growth trajectory. The Committee was also concerned about potential adverse external developments and the cautious approach to lending and financial intermediation by domestic deposit money banks.
The Committee welcomed the review of the Economic Recovery and Growth Plan (ERGP), in an effort to realise the objectives of the plan. In the same vein, the Committee urges a quick passage of the 2018 Appropriation Bill by the National Assembly, so as to keep fiscal policy on track and deliver the urgently needed reliefs in terms of employment and growth of the economy.
On financial stability, the Committee noted the concentration of non-performing loans in a few sectors but observed that the overall condition and outlook for the banking system was stable as deposit money banks’ balance sheets remained strong. This assessment is strengthened by developments in the national accounts and the expectations that the affected sectors are returning to growth. Nonetheless, the Committee urged further strengthening of supervisory oversight and deployment of early warning systems in order to promptly identify vulnerabilities and proactively manage emerging risks in the banking system. The Committee further observed that government was increasing debt, both domestically and externally, thus crowding out the private sector.
In arriving at its decision, the Committee appraised potential policy options in terms of the balance of risks. The Committee also took note of the gains made so far as a result of its earlier decisions; including the stability in the foreign exchange market and the moderate reduction in inflation and thus extensively deliberated the options regarding whether to hold , tighten or ease the policy stance.
While tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability. On the other hand, whereas loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could aggravate upward trend in consumer prices and generate exchange rate pressures. The Committee also feels that loosening would worsen the current account balance through increased importation. On the argument to hold, the Committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest. Members noted that the developments in output and inflation in particular required effective close monitoring in order to gain clarity on the medium term optimal path of monetary policy.
Consequently, the MPC voted to:
- (i) Retain the MPR at 14.0 per cent;
- (ii) Retain the CRR at 22.5 per cent;
- (iii) Retain the Liquidity Ratio at 30.0 per cent; and
- (iv) Retain the Asymmetric corridor at +200 and -500 basis points
around the MPR.“
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