CBN Retains 12 Percent Interest Rate

[ChannelsTV]

The Central Bank of Nigeria (CBN) Monetary Policy Committee has left the monetary policy rate unchanged at 12 per cent and expressed worry about the increased level of corruption in the country which it claims can affect the nation's output.

This is in spite of calls for the interest rate to be reduced to a single digit.

The committee also left the liquidity ratio at 30 percent.

Inflation rate accelerated to 9.5 percent in February from 9 percent a month earlier

The CBN Governor, Sanusi Lamido Sanusi who red the communiqué of the committee said it was faced with the options; An increase in rates in response to the uptick in headline and food inflation; and pressure on exchange rates; 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.

He said: "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 Committee, therefore, decided by a majority vote of 9:3 to accept option 3 and maintain the current policy stance."

On the Committee's considerations, he said it was pleased with the prevailing macroeconomic stability despite shocks from both external and domestic environments; a development which informed the tightening stance of monetary policy since the third quarter of 2010.

"Having achieved a reasonable degree of moderation in the rate of inflation, there were compelling arguments to consider easing monetary policy, at least from the perspective of stimulating growth in the real sector. 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 CBN.

"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, signalling the impact of increased inflows while equity prices have been trending upwards. Quantitative easing, especially in the US and the EU is already creating a potential new round of asset bubbles globally. The Committee was of the view that the growth in the domestic capital market was driven largely by the huge capital inflows. The principal risk to stability in the medium-to-long-term can be addressed through diligent implementation of sound policies of fiscal consolidation and structural reforms. Without these, the economy will not be able to attract long term foreign capital inflow that makes the gains of monetary policy sustainable and insulate the economy from the risks associated with external shocks and capital flow reversals. Monetary policy will, therefore, seek to preserve the current gains of macroeconomic stability in the short term, while fiscal and structural reforms kick in."

He said the Committee also noted the wide spread between deposits and lending rates, which it attributed to the inefficiencies in the market requiring institutional and structural reforms that would enforce behavioural change on the market, consistent with the long term needs of the economy.

"The Committee was of the view that sustainable low lending rates, could be achieved if the necessary infrastructure such as stable power and good roads, amongst others, were put in place. The Committee noted that the present infrastructural condition has always provided an incentive for asymmetric response on the part of the banks to the policy rate in a manner that was not always beneficial to the small and medium customers. With respect to the price level, the Committee observed that the rising pressure in February after a significant moderation in January, was indicative of the fact that there were some underlying factors that could constitute a threat to inflation in the medium term," he said.

"The Committee noted the 2013 Federal Government Budget of N4.9 trillion, passed by the National Assembly and signed into law by the President, which represents an increase of about 5 per cent. Furthermore, the budget, predicated on an oil benchmark price of US$79/barrel as against US$75/barrel, proposed by the Executive, potentially slows down the pace of fiscal consolidation with implications for accretion to the Excess Crude Account and gross external reserves.  In addition, the Committee observed that the foreign exchange market has started experiencing pressure in March 2013, mainly reflecting compression of yields in the fixed income market as well as outflows to pay dividends by multinational corporations. However, the Committee noted that the exchange rate has remained within the target range and also that the current monetary conditions are conducive to further tightening using Open Market Operations without recourse to an increase in the MPR."

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