[attachimg=1] AMIDST fears of a possible rise in inflationary trends in the country following Federal Government's 2011 fiscal plan as contained in the just passed 2011 Appropriation Bill as well as the huge spending by politicians for the next month general elections, the Central Bank of Nigeria (CBN) yesterday raised interest rate by 100 basis point, from 6.50 per cent to 7.50 per cent forthwith.
It however retained the symmetric corridor of +/- 200 basis points; retained the current CRR of 2.0 per cent and the liquidity ratio of 30 per cent and extended the CBN guarantee on inter-bank transactions and guarantee of foreign credit lines by three months from June 30, 2011 to September 30, 2011.
The action is to make the cost of borrowing from banks expensive, aimed at deterring frivolous spendings, guard the value of the naira from depreciating and keep inflation in the country in checks.
The CBN at its Monetary Policy Committee (MPC) meeting headed by the apex bank Governor, Sanusi Lamido Sanusi, which held between Monday and yesterday in Abuja, said the Federal Government's Budget of N4.9 trillion as passed by the National Assembly was "very expansionary'' because the economy as presently constituted lacked the consumptive capacity and hence was a threat to inflation control. It also restated that the Federal Government's continuous policy on subsidy on petroleum imports regime poses inflationary concerns.
The MPC, which is the highest economic policy decision-maker of the apex bank, yesterday put the level of year-on-year headline inflation for the month of February just past at 11.1 per cent, down from the 12.1 per cent level recorded in the previous month, January 2011 and 12.8 per cent in December 2010.
It also put the core inflation as at February at 10.6 per cent, down from 12.1 per cent in January and 10.9 per cent in December 2010. It said food inflation however rose to 12.2 per cent in February from 10.3 per cent in January but was lower than the 12.7 per cent in December 2010. It stated that the rise in food inflation was consistent with the seasonal pattern.
In addition, the apex bank declared that the increase in the costs of imported food items, transportation and energy contributed to food inflation. It then declared that with the output containing aggregate expenditure and moderating the impact of imported inflation via the exchange rate channel, the role of the fiscal prudence was very necessary.
Accordingly, the MPC in its communiqué released to newsmen at the end of the meeting noted as follows: "The MPC noted the positive growth outlook in the near to medium term, but expressed serious concern over the heightened risk of inflation following from the proposed high expenditure outlay of the Federal Government as contained in the 2011 Appropriation Bill recently passed by the National Assembly, especially in the wake of rising global food and energy prices.
"In this regard, the Committee recalled that in the past few MPC meetings, it had stressed the need for fiscal retrenchment and drawn attention to the unsustainability of the rising trend of domestic debt. However, the proposed expenditure outlay negates the initial sentiment for fiscal retrenchment, which would have supported monetary policy effectiveness. The current fiscal stance is inconsistent with the objective of maintaining stability in exchange rates, prices and interest rates. The committee, therefore, believes that unless the fiscal stance is reversed, the economy would have to bear a high cost in terms of pressure on foreign reserves, high interest rates and / or higher level of inflation.
"Against the foregoing, the MPC is of the view that a further tightening of monetary policy is imperative. This stance needs to be appreciated in the context of the fact that resolution of the problems in the banking sector has not yet been completed.
"However, a number of banks have signed a memorandum of understanding with core investors and public announcement will be made this week. In the light of this, the inter-bank guarantees and guarantees of foreign credit lines will need to be extended beyond the deadline of June 30 2011.
"The MPC, however, recognizes that any action that is taken at this point in time should not serve as a disincentive to the current high current growth impulses. It however recognizes that the principal problem is access to finance in critical sectors like agriculture and manufacturing. This should remain the focus of CBN in the short to medium term.
"In the light of the foregoing analysis, members of the committee voted unanimously for further tightening of monetary policy because of heightened risk of inflation. The members specifically pointed out the rising international food and energy prices, the impact costs on domestic prices, the challenges that fiscal stance posed to the external value of the naira and the likely front-loading of public expenditure in the election period. Against this background, the following decisions were taken: A majority of nine to three members voted for an increase in MPR by 100 basis points from 6.50 per cent to 7.50 per cent. The three members voted for a 50 basis point increase; a unanimous decision to: Retain the symmetric corridor of +/- 200 basis points; retain the current CRR of 2.0 per cent and the liquidity ratio of 30 per cent and extend the CBN guarantee on inter-bank transactions and guarantee of foreign credit lines by three months from June 30, 2011 to September 30, 2011."
Source: CBN eyes elections, budgetary spendings, raises interest rates (http://www.ngrguardiannews.com/index.php?option=com_content&view=article&id=42492:cbn-eyes-elections-budgetary-spendings-raises-interest-rates&catid=1:national&Itemid=559)