Central Bank Communique no 106 of the Monetary Policy Meeting- March 21-22, 2016.

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The Monetary Policy Committee met on
21st and 22nd March 2016 amidst
dithering global economic prospects
and continuing challenges in the
domestic economy. In attendance were
8 out of the 12 members. The
Committee appraised the international
and domestic economic and financial
environments in the first two months of
2016 as well as the outlook for the rest
of the year.

International Economic Developments
The Committee noted with concern the
further decline in global output at the
end of 2015, which grew at 2.3 per cent,
year-on-year in Q4, its slowest in three
years, representing a 0.3 percentage
point decline compared with 2.6 per
cent in Q3.
This deceleration stemmed from the
continuous slowdown of growth in the
emerging market economies, worsened
by deteriorating conditions in the Euro
area and China as well as key emerging
market economies. Other factors
include sustained pressure in global
financial markets arising from US
monetary policy normalization,
depressed global oil market and
persistently weakened global aggregate
demand.
The slowdown in growth in the US to
1.0 per cent in Q4 from 2.0 per cent in
Q3 was attributed to slowdown in
private consumption expenditure (PCE)
and non-residential fixed investments.
In Japan, output declined by 1.4
percentage points in Q4, 2015 in
contrast to the 1.3 per cent growth
recorded in Q3.
The Bank of Japan’s monthly asset
purchase program of ¥6.7 trillion
($56.71 billion) remains substantially
sub-optimal, as the economy continues
to lurch between contraction and
expansion, with the adoption of a
negative interest rate policy in January
2016.
In the Euro area, GDP grew by 1.5 per
cent in Q4 of 2015, and projected to
grow at 1.7 per cent in 2016. The
European Central Bank (ECB), at its
meeting on 10th of March, 2016 eased
monetary policy by further reducing its
refinancing rate to 0.0 per cent and
deposit rate to -0.4 per cent. The Bank
also expanded its monthly asset
purchase program from €60 billion
($65.4 billion) to €80 billion ($87.2
billion) to further stimulate output
growth and move inflation towards its
long term objective of 2 per cent.
On the other hand, the Bank of England
(BoE) sustained its stock of assets
purchase, financed through the
issuance of reserves at ₤375 billion
($536.25 billion), while retaining its
policy rate at 0.5 per cent. The BoE
further committed to investing ₤8.4
billion ($12.01 billion) of cash flows
associated with redemption of the
January 2016 government securities
held in the Asset Purchase Facility, with
a commitment to bringing inflation
closer to the 2 per cent target, reducing
unemployment and promoting growth.
Uncertainties and geo-political tensions
in the Middle East, including a
negotiated ceasefire agreement in Syria
and Iran’s re-entry into mainstream
international oil market may 4 have
further redefined conditions in the oil
market. The market witnessed some
uptick in prices following the resolve of
the Organization of the Petroleum
Exporting Countries (OPEC) and some
non-OPEC members to pursue a higher
anchor price, coupled with smaller-
than-anticipated buildup in stocks at
the Cushing Oklahoma delivery hub for
United States crude futures.
The Emerging markets and developing
economies (EMDEs) were forecast to
grow at 4.3 per cent in 2016, an
improvement over the 4.0 per cent
recorded in 2015. However, external
and domestic challenges have persisted,
stemming from low commodity prices,
troubled financial markets, tepid global
demand, policy uncertainty as well as
continuously feeble growth in global
trade.
In addition, weaknesses in major
emerging market economies,
diminished capital inflows, rising
borrowing costs and geopolitical factors
have been identified as possible
deterrents to growth in the EMDEs. In
the environment of suppressed
inflation, slow growth, weak global
demand and volatile financial markets,
the stance of monetary policy in the
advanced economies is expected to
remain accommodative in 2016, while
in the EMDCs, it is expected to be
underpinned by currency adjustments
and other complementary policies.

Domestic Economic and Financial
Developments Output
The Bank had adopted accommodative
monetary policy since July 2015 in the
hope of addressing growth concerns in
the economy, effectively freeing up
more funds for DMBs by lowering both
CRR and MPR, with excess liquidity
arising from the lower CRR warehoused
at the CBN. DMBs were to access these
funds by submitting verifiable
investment proposals in the real sector
of the economy. The funds have not
impacted the market yet because the
CBN was still processing some of the
proposals submitted by the DMBs.
In the first episode of easing which
resulted in injecting liquidity into the
Banking system, DMBs did not grant
credit as envisaged. Moreover, the
delay in passage of the 2016 Budget has
further accentuated the difficult
financial condition of economic agents
as output continues to decline due to
low investment arising from weak
demand.
The cautious approach to lending by
the banking system underpinned by a
strict regulatory regime conditioned by
the Basel Committee in the post global
financial crisis era has further alienated
investors from access to credit as banks
prefer to build liquidity profiles in
anticipation of government borrowing.
In the light of these developments,
domestic output growth in 2015
remained subdued as reported by the
National Bureau of Statistics (NBS).
Consequently, real GDP grew by 2.11
per cent in the last quarter of 2015,
more than half a percentage point
lower than the 2.84 per cent recorded
in the third quarter and 3.83 percentage
points in the corresponding period of
2014. Overall, growth in 2015 was
estimated at 2.79 per cent, compared
with 6.22 per cent in 2014.
The major impetus for growth
continued to come from the non-oil
sector which grew by 3.14 per cent in
Q4, 2015 compared with 3.05 per cent in
the preceding quarter. The key drivers
of growth in the non-oil sector were
Services, Agriculture and Trade;
contributing 1.23, 0.83 and 0.76
percentage points, respectively.
The Committee noted that the sluggish
growth in output was partly
attributable to certain fiscal
uncertainties, which inadvertently
hampered investment spending and
flows; intermittent fuel scarcity,
increased energy tariffs (without
commensurate improvement in power
supply), foreign exchange scarcity as
well as slow growth in credit to private
sector in preference to high credit
growth to the public sector.
The Committee noted that many of
these factors were outside the control
of monetary policy and given these
limitations, in the absence of
complementary fiscal and structural
policies, the only option was to
continue with the existing measures.
The MPC believes that complementary
fiscal and structural policies are
essential for reinvigorating growth.
Prices
The Committee noted the increase in
year-on-year headline inflation to 11.38
per cent in February 2016, from 9.62
per cent in January and 9.55 per cent in
December, 2015. The increase in
headline inflation in February reflected
increases in both food and core
components of inflation. Core 8
inflation rose sharply for the first time
to 11.00 per cent from 8.80 per cent in
January after a lull of three consecutive
months at 8.70 per cent through
December, 2015.
Food inflation also inched up to 11.35
per cent from 10.64 per cent in January
and 10.59 per cent in December, 2015.
The rising inflationary pressure was
traced to the lingering scarcity of
refined petroleum products, exchange
rate pass through from imported goods,
seasonal factors and increase in
electricity tariff.
The Committee noted that the factors
responsible for rising inflation were
more structural in nature than
monetary, but reaffirmed its
commitment to monitor the
developments closely and to work with
the relevant authorities to address the
underlying drivers of the upward price
movements.

Monetary, Credit and Financial Markets
Developments
Broad money supply (M2) grew by 2.29
per cent in February, 2016 in contrast
to 1.69 and 0.25 per cent in January
2016 and February 2015, respectively.
When annualized, M2 grew by 13.74
per cent in February 2016 against the
provisional growth benchmark of 15.24
per cent for 2016. Net domestic credit
(NDC) grew by 3.71 per cent in the
same period, 9 annualized, at 22.26 per
cent.
At this rate, the growth rate of NDC was
below the provisional benchmark of
29.30 per cent for 2016. Credit to the
private sector grew by 1.45 per cent in
February 2016, which annualized to a
growth of 8.70 per cent, below the
benchmark growth of 13.28 per cent.
The Committee noted with concern, the
dismal performance of growth in credit
to the private sector, noting that even
at that, credit went primarily to low
employment elasticity sectors of the
economy. Money market interest rates
reflected the liquidity situation in the
banking system
Average inter-bank call and OBB rates,
which stood at 0.5 and 2.77 per cent on
25 January 2016, closed at 4.00 and 5.00
per cent, respectively, on March 9, 2016.
Between January 25th and end-February
2015, interbank call and OBB rates
averaged 1.43 and 2.68 per cent,
respectively. This was traced to
liquidity surfeit in the banking system.
The deposit money banks were,
however, reluctant to grant new credit
because of rising non-performing loans
(NPLs), mainly in the oil sector,
amongst other reasons. 10 The
Committee also noted the slight
improvement in the equities segment of
the capital market during the review
period.
The All-Share Index (ASI) rose by 8.1
per cent from 23,916.15 on January 29,
2016 to 25,853.58 on March 14, 2016.
Similarly, Market Capitalization (MC)
rose by 8.02 per cent from N8.23 trillion
to N8.89 trillion during the same
period. However, relative to end-
December 2015, the indices declined by
9.73 per cent and 9.74 per cent,
respectively. |

External Sector Developments
The average naira exchange rate
remained stable at the inter-bank
segment of the foreign exchange
market during the review period. The
exchange rate at the interbank market
opened at N197.00/US$ and closed at
N197.00, with a daily average of
N196.99/US$ between January 25 and
March 14, 2016.
The Committee reiterated its
commitment to maintaining a stable
naira exchange rate. The MPC took note
of the high level of activity in the
autonomous foreign exchange market
as well as the rising demand in the
interbank market but observed that the
data on demand 11 for foreign
exchange had become ‘very noisy’,
being overshadowed by speculative
demand.
However, the Committee charged the
Bank to speed up reforms of the foreign
exchange market to improve certainty
and eliminate noise and opportunities
for arbitrage.

The Committee’s Considerations
The Committee noted the weakening
macroeconomic environment, reflected
particularly in foreign exchange
shortages, slowing GDP growth rate and
rising inflation. Overall economic
growth slowed significantly in 2015,
particularly in Q4.
Apparently, the conditions responsible
for the slowdown – uncertainty around
fiscal policy, adverse external
environment, security challenges in
some parts of the country affecting
production and distribution of
agricultural produce, low electricity
supply, fuel shortages, and sluggish
growth in credit to the private sector –
have continued in the first quarter of
2016.
On the monetary front, contrary to the
notion of liquidity overhang in the
financial system, the wider economy
appears starved of the needed liquidity
to spur growth and employment. Recent
performance of the monetary
aggregates lends credence to this fact.
With the exception of credit to
government, growth in all the monetary
aggregates remained largely below their
indicative benchmarks, yet; headline
inflation spiked to 11.38 per cent in
February 2016, substantially breaching
the policy reference band of 6 – 9 per
cent. Apparently, the increase in
inflation was driven not so much by
liquidity, but by structural factors such
as fuel scarcity, increased electricity
tariff, persistent insecurity, exchange
rate pass through and seasonality of
agricultural produce.
The conflicting signals from slowing
growth and rising inflation present a
difficult policy challenge. Though
mindful of the limitations of monetary
policy in influencing the drivers of the
current price spiral, the Committee
stressed the need to urgently address
the key sources of the pressures.
In this regard, the Committee
reaffirmed its commitment to closely
monitor the development while
working with relevant authorities to
address the structural bottlenecks.
From the monetary data, the Committee
noted that the excess liquidity in the
banking system was contributing to 13
the current pressure in the foreign
exchange market with a strong pass-
through to consumer prices.
The Committee further noted that
previous efforts to reflate the economy
in order to spur growth did not elicit
the required response from DMBs,
hence; the surfeit of liquidity in the
interbank market. Obviously, the
attendant low rates at that market have
not transmitted to the term structure of
interest rates.
Concerned about the need for low
interest rates to support growth and
employment, the Committee urged the
CBN to explore innovative ways of
ensuring the unhindered flow of credit
at low cost to key growth sectors even
as monetary policy has to, under the
circumstance, address the liquidity
surfeit in the banking system as well as
the pressure on exchange rate and
consumer prices.
The Committee hopes that fiscal and
other structural policies would soon be
deployed to strengthen the overall
response of macroeconomic policy to
the shocks. The Committee was also
concerned that with headline inflation
at 11.38 per cent, noting that the policy
rate had become negative in real terms.
This development has the potential of
keeping both foreign and domestic
investments on hold. As part of
measures to address the supply
constraint in the foreign exchange
market, yields on domestic instruments
have to be competitive to attract the
much needed foreign inflows.
On the administrative side, this will
have to be complemented by a
comprehensive reform of the foreign
exchange market which is currently
being undertaken. For the avoidance of
doubt, the Bank would continue to
allow domiciliary account holders
unfettered access to funds in their
accounts.
The Committee also enjoined the
relevant agencies to speed up passage
of the 2016 Budget in order to halt the
depressing effect of the uncertainty that
engulfs the waiting period, hoping that
the implementation of the budget
would go a long way in boosting
business confidence, and reinvigorating
the financial markets. In the
circumstance, the Committee urged the
Bank to continue to upscale its
surveillance of the financial system
with the aim of promptly detecting and
managing vulnerabilities to ensure
sustained stability.
Finally, the Committee remains
committed to price stability across the
range of consumer prices, exchange
rate and 15 interest rate, which is
fundamental to reviving economic
growth and employment generation. In
the meantime, the Bank would continue
to leverage its development finance
policy to support critical sectors of the
economy. The MPC also stressed the
need to sustain, deepen and speed up
reforms designed to ensure focused
coordination of monetary and fiscal
policies.

The Committee’s Decisions
The Committee, in its assessment of
relevant internal and external indices,
came to the conclusion that the balance
of risks is tilted against price stability.
The MPC therefore, voted to tighten the
stance of monetary policy. One member
voted to retain the CRR at 20.00 per
cent while another member voted to
retain the current width of the
asymmetric corridor.
In summary, the MPC voted to:
(i) Raise MPR by 100 basis
points from 11.00 per cent to
12.00 per cent;
(ii) Raise CRR by 250 basis
points from 20.00 to 22.50 per
cent; 16
(iii) Retain Liquidity Ratio at
30.00 per cent; and
(iv) Narrow the asymmetric
corridor from +200 and -700
basis points to +200 and -500
basis points
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd March 2016

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