Nigeria maintains monetary policy rate at 12%

The MPC chose to keep the monetary policy rate unchanged at 12 per cent

Nigeria’s Monetary Policy Committee, MPC, on Tuesday retained the nation’s Monetary Policy Rate, MPR, at 12 per cent, for the sixth consecutive time.

The MPC is saddled with the responsibility of formulating monetary and credit policies, maintaining external reserves to safeguard the value of the legal currency and maintenance of a sound and efficient financial system in Nigeria.

The Committee, which consists of the Governor of the Bank, the four Deputy Governors of the Bank, two members of the Board of Directors of the Bank, three members appointed by the President; and two members appointed by the Governor, also retained Cash Reserve Ratio, CRR, at 8.0 per cent; and retained minimum liquidity Ratio of 30.0 per cent.

The Committee reviewed domestic and international economic and financial conditions with a view to addressing monetary policy challenges in the short-to medium-term. The Committee also resolved to closely watch developments with respect to the fiscal stance and to respond appropriately if, and when, the need arises.

“Given the slowdown in overall GDP and agricultural GDP growth, inability of the SMEs to borrow at the current lending rates, and crowding out effects that may require monetary easing, the Committee carefully weighed the option of relaxing monetary policy against the likely risks in the near-to-medium term, noting that reversing the current stance of monetary policy was not likely to produce a neutral outcome, as it may signal the preference for a higher inflation rate on the part of the Central Bank,” the Central Bank Governor, Lamido Sanusi, stated in a communiqué released after the meeting.

“At 9.0 and 9.5 per cent in January and February, respectively, the price data, which largely reflected the base effect of the first and second round impact of the fuel subsidy removal in January 2012, sends a clear signal that there was still an upside risk to inflation in the near-to-medium term. Furthermore, yields on FGN bonds have been declining steadily, signaling the impact of increased inflows while equity prices have been trending upwards,” Mr. Sanusi added.

The Committee also noted the wide gap between deposits and lending rates and attributed it to the inefficiencies in the market. It said the market requires institutional and structural reforms that would enforce behavioural change consistent with the long term needs of the economy.

In view of these developments, the committee stated that it was faced with three options: an increase in rates in response to the uptick in headline and food inflation; pressure on exchange rates; and a reduction in rates in view of declining core inflation and GDP growth and retaining current monetary policy stance to sustain the gains of monetary policy while utilizing the existing space in the corridor to influence yields and exchange rates in the short term.

“The Committee considered and rejected option 1 as being unnecessary since there are no major inflationary concerns at this time. While acknowledging the merit of the arguments in favour of option 2, it was also rejected by the majority because it could send wrong signals of a premature termination of an appropriately tight monetary stance,” the communiqué stated.

The Committee, therefore, decided by a majority vote of 9:3 to accept option three and maintain the current policy stance i.e. to retain the MPR at 12 per cent with a corridor of +/- 200 basis points around the midpoint; retain the Cash Reserve Requirement at 12 per cent and Liquidity Ratio at 30 per cent with the Net Open Position at one per cent.

Yvonne Mhango, a Sub-Saharan Africa Economist said this outcome was expected.

“The MPC chose to keep the monetary policy rate unchanged at 12 per cent following today’s meeting, partly due to upside risk to inflation. This was in accordance with our and the consensus view.

“The MPC attributes the slowdown in inflation to base effects and a stable exchange rate; but remains concerned about the upside risk to inflation of fiscal spending” she said.

The MPC also expressed concern about the downside risk to growth of a slowdown in oil production, due to oil theft.

“Notably, the MPC stated that the central bank has the scope to sell more dollars implying that the recent rise in Forex demand can be met by the Central Bank, which should ease pressure on the naira,” she added.

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