Central Bank of Nigeria Communiqué No. 80 of the Monetary Policy Committee Meeting, Monday, November 21, 2011
The Monetary Policy Committee (MPC) met with 11 out of the 12 members present on 21st November, 2011 to review domestic economic conditions up to the early part of Q4 2011 and the challenges facing the Nigerian economy against the background of developments in the international economic and financial environment in order to reassess the options for monetary policy for the remaining part of the year and Q1 2012.
The Committee noted that international economic and financial conditions had deteriorated with possible threats of financial shocks from Europe, making it very difficult to correct the serious imbalances that have developed in the international economy since the peak of the global economic and financial crises. Most of the major industrial economies are at present economically weak and are expected to remain in recession with high unemployment rates and large unsustainable fiscal imbalances for an extended period, going by the recent forecasts of most international institutions.
Inflation rates, with the exception of Japan, are expected to be higher than in 2010. It is projected at around 3.0 per cent in 2011 in the US, the Euro-area and the UK compared with 1.9 per cent in 2010.The ratio of government debt to GDP for the European Union remains high and has led to a change of governments in Greece and Italy and a likely election of conservative government in Spain. It has also led to the adoption of tougher austerity measures including staff rationalization and privatization. In the case of some countries of the Euro area, the markets are still not certain that the risk of sovereign default will be addressed expeditiously and in an efficient manner. These concerns have opened up issues relating to financial stability, given the considerable exposures of banks and other financial institutions to government securities across countries. Consequently, financial markets have become nervous with their uncertainties reflected in the volatility of stock, bond and foreign exchange markets. Current account imbalances are also projected to be high in 2011 in both the US and the Euro area.
The Committee noted that, with the limited available fiscal space, the burden of economic adjustment has fallen on central banks in the industrial economies. However, as the policy rates are close to zero, the only recourse available to central banks to promote recovery is through quantitative easing. In resorting to quantitative easing, the Committee is concerned that central banks, particularly, in the US and UK, are failing to recognize the limitations of monetary policy and delaying the difficult but inevitable structural adjustment required by the developed world to avoid a recession.
A significant amount of sovereign debt needs to be written off, systemically important banks need to be recapitalized (and if necessary nationalized) and stronger austerity measures need to be put in place in the US and the Europe. Concerns over elections in 2012 in the US, Germany and France seem to be getting in the way of these tough decisions. Failure to act quickly may lead Europe into a prolonged recession that could lead to a permanent loss of competitiveness and economic vibrancy.
Emerging countries are also projected to record lower growth rates in 2011 than in 2010. Given the high degree of real and financial integration with the industrial economies, a quick rebound in growth in 2012 does not seem to be realistic at this point in time. In many emerging countries, inflation rates are relatively high. There are also concerns about financial asset prices and the growing non-performing loans of banks. In China, early signals of a collapse in property prices have emerged and should the real estate bubble burst, this will have an impact on China’s growth prospects. Fiscal imbalances have also been high in many countries.
Growth performance of industrial and emerging economies in 2012 is vital for Nigeria’s economic performance. Oil demand, in the Committee’s view, would soften as a consequence of slow global growth and would necessitate comprehensive and sound policy actions to help diversify the domestic economy away from oil. The impact of external developments on the domestic economy working through the channels of trade, finance and confidence has, in the Committee’s view, been strong and would need to be addressed efficiently and expeditiously.
On the domestic front, the Committee observed a mild resurgence of inflationary pressures at the end of the third quarter and beginning of the fourth quarter of the year, after they had moderated following a series of monetary policy tightening measures. The inflation outlook, however appears mixed, and is complicated by the fact that the full effects of the recent aggressive monetary tightening measures are yet to be felt. Latest output growth projections remained robust, even though lower than earlier projected. The Committee observed no major threats to financial system stability and welcomed the conclusion of the banking sector recapitalization exercise, which places the banks in a strong position to weather external shocks and also lays the foundation for strong earnings and credit growth.
Key Domestic Macroeconomic and Financial Developments
Output and Prices
The Committee observed that the robust output growth recorded since the beginning of the year has been sustained. Real output growth was estimated at 7.40 per cent in Q III of 2011 as against 7.86 per cent in the corresponding quarter of 2010, according to the latest estimates of the National Bureau of Statistics (NBS). Non-oil GDP was estimated to grow sharply by 8.81 per cent in Q III of the current year as compared with 8.38 per cent recorded in Q III of the previous year. For the year as a whole, real GDP growth was projected at 7.69 per cent, slightly lower than the 7.87 per cent attained in 2010.
The Committee noted with satisfaction that the expected output performance in 2011 was higher than the average growth of 6.63 per cent recorded since 2004. As investments increase and productivity improves, real GDP could double in less than ten years from now if the potential growth is elevated slightly over the average growth recorded in the last seven years.
The year-on-year headline inflation rate rose to 10.5 per cent in October 2011 from 10.3 per cent in September. Similarly, food inflation rose to 9.7 per cent in October 2011 from 9.5 per cent in September. However, core inflation declined marginally to 11.5 from 11.6 per cent in September.
Coming on the heels of a series of monetary policy measures, and at a time of global uncertainty, the numbers send mixed signals for inflationary expectations in spite of the uptick in year-on-year headline inflation. For instance, all broad measures declined on a month-on-month basis. Headline inflation declined by 0.9 per cent in October compared to an increase of 1.4 per cent in September. This was a result of a month-on-month decline of 0.8 and 0.7 per cent in food and non-food inflation compared to increases of 1.9 and 0.9 per cent, respectively, in the preceding month.
On the fiscal front, the Ministry of Finance continued to stress its commitment to a tighter fiscal stance and has already indicated a reduction in the benchmark price of oil from US$75.0 per barrel to US$70.0 per barrel. It has also adopted an exchange rate assumption consistent with the current stance of monetary authorities. Although, the Sovereign Wealth Fund is subject to continuing political negotiations between States and Federal Governments, it would appear from public statements on both sides that a positive resolution would be reached very soon. The risk to inflation from removal of fuel subsidy is ever-present. However, whenever the policy becomes effective, the Central Bank stands ready to react to any second round effects of a price adjustment.
As a matter of policy, the Central Bank will not respond to first-round shocks, as tightening money supply in such a circumstance will be pro-cyclical. Finally, in view of the external developments above, any softening in oil prices will impact negatively on government revenue receipts. Given the concerns over the budget deficit, such a development would lead to a forced adoption of belt-tightening measures, thus, providing the much-needed fiscal support in the effort to rein in inflation. In such a circumstance, further tightening may also turn out to be pro-cyclical, especially, as the full effects of recent measures are still working their way through the system. Given the cost of borrowing in current tight monetary conditions, the Committee projects that in the face of revenue shocks, the likely reaction of the authorities will be a reduction in non-essential spending, rather than an increase in public debt.
Monetary, Credit and Financial Market Developments
Provisional data indicate that aggregate domestic credit (net) grew by 24.57 per cent in October 2011 over the end-December 2010 level, and by 29.48 per cent when annualized, which was below the indicative benchmark of 32.58 per cent for 2011. The growth in aggregate credit (net) in October 2011 was due to increases in credit to the private sector as well as State and Local governments. Credit to the private sector grew by 24.24 per cent (29.09 per cent on annualized basis) which was higher than the indicative benchmark of 23.34 per cent for 2011. However, credit to the Federal Government which fell by 21.65 per cent (25.98 per cent on annualized basis), was below the indicative benchmark growth rate of 29.29 per cent for 2011. This was due to the fiscal surplus of N307.84 billion in July 2011 following the sharing of the arrears of budget augmentation (January-April, 2011) which reduced the need for government borrowing.
Rates at the interbank money market moved in tandem with the upward reviews of the MPR at the MPC meetings during the period. The average interbank call and Open buy back (OBB) rates rose from 11.38 and 11.16 per cent before the extra-ordinary MPC meeting, held in October 2011, to 15.00 and 13.70 per cent, respectively, after the meeting, reflecting the spike in the MPR. In addition, the upward review of the CRR and the sterilization of the funds helped to push up inter-bank rates to a high of 18.06 per cent on October 14, 2011. The Interbank and OBB rates, which opened at 10.74 and 10.63 per cent on September 19, 2011 rose to 17.09 and 14.00 per cent on October 31, and closed at 14.30 and 13.26 per cent, respectively, on November 15, 2011. Other factors responsible for the upward movement in rates included the various OMO auctions conducted to mop-up excess liquidity, as well as the low level of liquidity in the banking system following the deadlock at the Federation Accounts Allocation Committee meeting which culminated in the late release of statutory revenue to the three tiers of government. However, the purchase of AMCON bonds by the Bank and the injection of funds, moderated rates in the market.
The Committee also noted that deposit money banks have improved the rates on fixed-term deposits. Thus, the average weighted three-month deposit rate has gone up to 7.06 per cent in October from 5.49 per cent in September. Also, the rates on deposits for 12 months increased from 4.47 per cent in September to 4.90 per cent in October, 2011. The average weighted interest bearing deposit rate stood at 4.93 per cent in October compared with 4.02 per cent in September. This increase in rates had been anticipated by the Committee and is likely to continue especially as we approach the December 31, 2011 deadline for the removal of the CBN guarantee on the interbank market. Lending rates have also gone up in response to tighter conditions in the money market.
The Committee observed that the bearish performance of the Nigerian capital market continued for most of the year. The All-Share Index (ASI) decreased by 18.0 per cent on a year-to-date basis from 24,770.52 at end-December 2010 to 20,311.51 on November 18, 2011. Market Capitalization (MC) also declined, by 19.2 per cent, from N7.91 trillion to N6.39 trillion over the same period due partly to the delisting of acquired banks. The bearish market is consistent with the trends globally in a very uncertain world where fund managers have resorted to a flight to safety. High yields on fixed income securities and subdued activity from investors in the wake of the Euro Zone crisis should advise against undue optimism for a rally in stocks in the short-term. However, strong earnings and fundamentals mean that the market is at present very attractive to long-term investors but not speculators.
External Sector Developments
The Committee observed some restoration of stability in the Foreign exchange market since the last MPC meeting. The average exchange rate appreciated at all three segments of the market during the period. At the wDAS market, the exchange rate opened at N158.48/US$ (including 1% commission) on October 11, 2011 and closed at N156.05/US$ on November 18, 2011, representing an appreciation of N2.43k or 1.53 per cent within the period. At the inter-bank segment, the selling rate opened at N158.90/US$ and closed at N158.62/US$, representing an appreciation of N 0.28k or 0.17 per cent. At the BDC segment, the selling rate opened at N165.00/US$ and closed at N160.00/US$, representing an appreciation of N5.00k or 3.03 per cent for the period. The external reserves position has continued to improve, closing at US$34.38 billion of international reserves as at November 17, 2011.
The Committee felt that external developments have in general responded favorably to monetary policy stance adopted in the last MPC meeting in October. It urged the Central Bank to be vigilant with respect to the developments in the foreign exchange market and maintain its stance in favour of stable exchange rates, and send clear signals that will help anchor the expectations of investors, manufacturers, and policy makers in the short-to-medium term.
The Committee’s Considerations
The Committee reviewed its decisions over the course of 2011 and their impact on the Bank’s core mandate of maintaining price stability. It noted that Nigeria had been ahead of all other African countries in anticipating the impending danger of inflation and started its monetary tightening cycle at a time other African Central Banks were still holding or reducing policy rates. It noted that these decisions have helped in controlling pressures on the general price level and in maintaining a relatively stable equilibrium in the foreign exchange markets. Where this equilibrium is disturbed by external factors, the ability to respond rapidly has succeeded in quickly restoring stability. The Committee also noted the mixed signals sent by inflation numbers for October 2011. The slight uptick in headline inflation year-on-year represents only a 20 basis-point increase from a high base of 10.3 per cent, and it is important not to exaggerate its significance. The index of all items except food declined marginally year-on-year, and all three broad indices (headline, food and core) showed a month-on-month decline in October, against month-on-month increases in the previous month.
On the fiscal side, a moderated oil benchmark price coupled with very strong public statements of commitment to fiscal consolidation by the fiscal authorities, give rise to optimism about long-awaited support on the fiscal side. Global headwinds may lead to a softening of commodity markets, thus reducing the resources available to fiscal authorities and contributing to a disinflationary process.
The Committee noted the continuing demand pressures in the foreign exchange market and the slow rate of reserve accretion as indicators that liquidity conditions may still need further tightening. On the other hand, lending rates are already high and having impact on the real sector, and global headwinds may make further tightening counter-productive and pro-cyclical should oil price fall significantly. Also, a combination of small fiscal adjustments and moderate depreciation in the exchange rate of the naira should compensate for maintaining current interest rate stance. Finally, the Committee noted that December is usually a period of mutedeconomic activity, and an appropriate time to pause and assess the full impact of the recent tightening decisions after a lag.
The Committee decided as follows:
- By a unanimous vote to retain the MPR at 12.0 per cent and the symmetric band at +/-200 basis points.
- To retain the CRR at 8.0 per cent.
- To adjust the mid-point of target official exchange rate from N150.00/USid=”mce_marker”.00 to N155.00/USid=”mce_marker”.00 and maintain the band of +/-3.0 per cent. This means that the naira should float roughly within a range of N150.00/USid=”mce_marker”.00–N160.00/USid=”mce_marker”.00, unless extraordinary shocks necessitate a change in stance.
- To encourage the CBN to continue to seek convergence between wDAS and interbank rates to reduce arbitrage opportunities, avoid speculative attacks, and the emergence of a multiple-exchange rate environment.
Sanusi Lamido Sanusi, CON
Central Bank of Nigeria
November 21, 2011