Nigeria Holds Key Rate Steady at 14%

The central bank of Nigeria left its benchmark interest rate unchanged at 14 percent at its September 2016 meeting, as expected. It follows a 200bps hike last meeting aiming to control the inflation and support the naira after the central bank abandoned the currency peg to the dollar in June. The inflation rate hit an eleven-year high of 17.6 percent in August and the economy shrank for the first time in more than twenty years in the second quarter of 2016 due to lower oil prices. The cash reserve ratio for commercial banks was also left on hold at 22.5 percent.

Excerpts from the Statement by the Central Bank of Nigeria:

The Committee acknowledged the weak macroeconomic performance and the challenges confronting the economy, but noted that the MPC had consistently called attention to the implications of the absence of robust fiscal policy to complement monetary policy in the past. The Committee also assessed the impact of its decision to tighten the stance of monetary policy by raising the MPR in July 2016. At the time, the Committee understood the complexity of the challenges facing the economy and the difficulty of arriving at an optimal policy mix to address rising inflation and economic contraction, simultaneously.

The Committee also recognized that monetary policy had been substantially burdened since 2009 and had been stretched. The Committee noted that new capital flows into the economy, approximately US$1 billion, had come in since July, while month-on-month inflation has declined continuously since May 2016. Against this ackground, members reemphasized the need to prioritize the use of monetary policy instruments in dealing essentially with stability issues around key prices (consumer prices and exchange rate) as prerequisites for growth.

The MPC considered the numerous analysis and calls for rates reduction but came to the conclusion that the greatest challenge to the economy today remains incomplete fiscal reforms which raise costs, risks and The MPC recognized the weak macroeconomic environment, as reflected particularly in increasing inflationary pressure and contraction in real output growth. In view of this, the MPC underscored the imperative of coordinated action, anchored by fiscal policy, to initiate recovery at the earliest time. Members called on the Federal Government to fast-track the implementation of the 2016 budget in order to stimulate economic activity to bridge the output gap and create employment. In the same vein, the MPC expressed concern over the non-payment of salaries in some states and urged express action in that direction to help stimulate aggregate demand. 

The data available to the Committee and forecasts of key variables suggest that the outlook for inflation in the medium term appears benign. First, month-on-month inflation has since May 2016 turned the curve; second, harvests have started to kick-in for most agricultural produce and should contribute to dampening consumer prices in the months ahead; and third, the current stance of monetary policy is expected to continue to help lock-in expectations of inflation which, has started to improve with the gradual return of stability in the foreign exchange market. In this light, the MPC believes that as inflows improve, the naira exchange rate should further stabilize. 

The Committee assessed the relevant risks, and concluded that the economy continues to face elevated risks on both price and output fronts. However, given its primary mandate and considering the limitations of its instruments with respect to output, the Committee elected to retain the current stance of policy.

In summary, all 10 MPC members voted to:
(i) Retain the MPR at 14.00 per cent;
(ii) Retain the CRR at 22.5 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent;
(iv) Retain the Asymmetric Window at +200 and -500 basis points around the MPR

Central Bank of Nigeria | Mojdeh Kazemi |
9/20/2016 4:34:51 PM