Monetary Policy Committee Meeting- Shocking Outcome

Fashion home! The Monetary Policy Committee met on 23rd and 24th of May 2016 for the 250th time and 9 out of 12 members were present. The meeting was to deliberate on the harsh and challenging global and domestic economics and financial conditions confronting the country. The Committee discussed the following matters: 

International Economic Developments

The  Committee  noted  with  concern,  the  tapered  growth  and  continued decline  in  global output  since  2014.  At  an  estimated  3.2  per  cent,  global output  in 2016 was only  0.1 percentage point  below the 3.1  per cent in the corresponding  period  of  2015.  The  sluggish  global  output  was  traced  to weak  fundamentals  in  both  the  advanced  economies  and  Emerging Markets and Developing Economies (EMDEs), including increased volatility in  global  financial  markets,  sustained  softness  in  commodity  prices, sluggish  global  trade,  resulting  in  persistent  fragility,  particularly  in  the EMDEs.

The  United  States  (US)  economy  slowed  to  0.5  per  cent  in  Q1  2016,  a steep decline compared with the 1.4 per cent growth recorded in the last quarter  of  2015.  The deceleration  in  US  growth  was  attributed  to contraction  in  non-residential  fixed  investment  and  energy  businesses,  a strong dollar which harmed exports, slowdown in government spending and moderation  in  private  consumption  expenditure  (PCE).  Japan which is currently in deflation is projected to grow by 0.5 per cent in 2016, the same as in 2015, on the back of persistently weak aggregate demand.  The Bank of Japan’s  (BoJ)  monthly asset purchase of ¥6.7 trillion (US$61.73 billion) resulted  in  the  Bank  holding  about  one-third  of  outstanding  government bonds, while the economy remained largely intractable with a credit crunch, indicating that the programmme may have lost its steam. In response to the contraction in credit, BoJ since January 2016, adopted a negative interest rate policy.

Real  GDP  growth  in  the  Euro  area  at  0.6  per  cent  in  Q1,  2016  was  a phenomenal improvement compared with the 0.3 per cent achieved in Q4 2015. The European Central Bank (ECB), at its meeting of 21st April, 2016 maintained the soft policy stance by holding its refinancing rate at 0.0 percent, lending rate at 0.25 per cent and deposit rate at -0.4 per cent. The Bank  also  maintained  its  monthly  asset  purchase  program  of  €80  billion (US$87.2 billion), hoping to further stimulate output growth and achieve its 2 per cent inflation target.

The  Bank  of  England  (BoE)  also  retained  its  monthly  assets  purchase programme,  financed  through  the  issuance  of  reserves  at  ₤375  billion (US$543.75 billion). At the end of its April 13, 2016 meeting, BoE retained its policy rate at 0.5 per cent, with a commitment to raise inflation to its 2.0 per cent long run path. Weaknesses in major  EMDEs, including low capital inflows, rising costs of funds  and  continuing  geopolitical  factors,  have  been  identified  as  key constraints  to  growth.  Adverse  commodity  prices  continued  to  provide strong  headwinds  against  growth,  defining  other  economic  and  financial conditions in the EMDEs.  Consequently, the IMF (WEO April 2016 Update) downgraded the 2016 growth forecast for this group of countries from 4.3 to 4.1 per cent. Disruptions  to  oil  supply  in  Canada,  Nigeria  and  Kuwait  and,  demand spikes  following  expectations  of  a  US  interest  rate  hike  and  buildup  of crude  oil  inventories,  contributed  to  mild  oil  price  recovery  in  April  2016.

Inflation  remains  largely  suppressed  in  the  advanced  countries  but  tepid consumption spending and  vulnerabilities in the  financial markets  continue to hamper financial intermediation and growth. Consequently, the monetary policy stance in most advanced economies remained largely accommodative and most likely to be maintained throughout 2016.  On the contrary, monetary policy in the EMDEs could continue to diverge substantially, reflecting the diversity of shocks confronting them.

Domestic Economic and Financial Developments


In  the  first  quarter  of  2016,  the  economy  suffered  from  severe  shocks related to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others. Consequently economic agents  could  not  undertake  new  investments  or  procure  needed  raw materials.  Shortage of foreign exchange arising from low crude oil prices manifested in low replacement levels for raw materials, other inputs as well as new investments.  In addition,  the  energy crisis experienced in the first five  months  of  the  year,  resulted  in  increased  power  outages  and  higher electricity  tariffs,  as well as  fuel shortages;  which led  to factory closures  in some  cases.  The  prolonged  budget  impasse  denied  the  economy  the timely  intervention  of  complementary  fiscal  policy  to  stimulate  economic activity in the face of dwindling  foreign capital  inflows. Aggregate credit to the private sector remained highly tapered while credit to government grew beyond the programmed benchmark for the period.  The Committee, however,  noted  that  many  of  the  prevailing  conditions  in  the  economy during the review period were outside the direct control of monetary policy, but hopes that the implementation of the 2016  Federal Budget, supported by  relevant sectorial policies and easing supply shocks in energy and critical inputs, would provide the needed boost to the economy.

Against this backdrop, data from the National Bureau of Statistics (NBS) for May 2016,  indicated that  domestic output  in Q1,  2016  contracted  by  0.36 per cent,  the first  negative growth in  many  years. This represents  a drop of 2.47 percentage points in output from  the  2.11 per cent reported  in the last 5 quarter  of  2015,  and  4.32  percentage  point  lower  than the  3.96  per  cent recorded  in  the corresponding period of 2015.  Aggregate output contracted in  almost  all sectors  of  the  economy,  with  the  non-oil sector  declining  by about 0.18 per cent  in Q1 2016, compared with 3.14  per cent  expansion in the preceding quarter. Only agriculture and trade grew by 0.68 per cent and 0.40  per  cent,  respectively,  while  Industry,  Construction  and  Services recorded  negative  growth  of  -0.93,  -0.26  and  -0.08  percentage  point, respectively.


The Committee noted  a further  increase  in  year-on-year headline inflation to  12.77 per cent and  13.72 percent  in  March and April  2016, respectively, from  11.38  per cent in February  2016.  The  increase  in headline inflation in April  reflected  increases  in  both  food  and  core  components  of  inflation. Core inflation  rose  sharply  for the  third  time in a row  to  13.35  per cent in April from 12.17 per cent in March, 11.00 per cent in February and 8.80 percent  in  January  having  stayed  at  8.70  per  cent  for  three  consecutive months through December, 2015. Food inflation also rose to 13.19 per cent from 12.74 per cent in March,  11.35 per cent in February,  10.64 per cent in January  and  10.59  per  cent  in  December,  2015.  The  rising  inflationary pressure  continued  to  be  traced  to  legacy  factors  including  energy  crisis reflected in incessant scarcity of refined petroleum products, exchange rate pass  through from imported  goods,  high  cost of  electricity,  high  transport cost, reduction in food output, high cost of inputs and low industrial output. 

The  Committee  observed that in an economy  characterized by  high import dependence,  the  shortage  of  foreign  exchange  provided  some  basis  for price  increases  as currently  being  experienced. The Committee noted that the economy needed to aggressively earn and build up its stock of foreign reserves in  order to avoid distortions  when faced with  severe shocks. The Committee  further  noted  that  the  current  inflation  trend,  being  largely  a product  of  structural  rigidities  and  inadequate  foreign  exchange  earnings would  continue  to  be  closely  monitored,  and  in  coordination  with  fiscal policy,  with a view to addressing the underlying drivers of the upward price movements.

Monetary, Credit and Financial Markets Developments Broad  money  supply  (M2)  grew  by  3.49  per  cent  in  April  2016,  a  1.29percentage  growth  from  the  March  level  of  2.20  per  cent  and  compared with  the  3.67  per cent in  April  2015.  When annualized, M2 grew by 10.47 per cent in April 2016 against the provisional growth benchmark of 10.98 per cent for 2016. Net domestic credit (NDC)  grew by  7.87  per cent  in  the same period  and  annualized  at  23.61  per cent.  At this rate, the growth rate of NDC was above the provisional benchmark of 17.94 per cent for 2016.

The  development  in  NDC  essentially  reflected  the  significant  growth  in credit to government of  35.97  per cent in the month, annualized to 107.91 per cent.  Credit  to the private sector grew by  3.52  per cent in  April  2016, which  annualized  to  a  growth  of  10.56  per  cent,  below  the  benchmark growth of 13.28 per cent. 

The Committee observed with concern, the continuous dismal performance of growth in credit to the private sector, noting that in spite of the Bank’s efforts, DMBs continued to direct credit largely to low employment elastic sectors of the economy, a phenomenon that had significantly contributed to the low performance of the economy.

Money market interest rates reflected the continuing liquidity surfeit in the banking system.   Average inter-bank call rate, which stood at  4.50  per cent on  21st March  2016,  closed at  8.67  per cent  on  March  18, 2016.  Between March 25th and 14th April 2016, interbank call rate averaged 2.00 per cent.

The  Committee noted  a decline in activity in the inter-bank market in the period  under  review,  which  was  due  to  the  payment  of  FAAC  statutory allocations and the maturity of CBN securities. The Committee  also  noted  a  further  improvement  in  the equities segment of  the  capital  market  as  the  All-Share  Index  (ASI)  rose  by  3.34  per  cent from  25,899.91  on  March  24,  2016  to  26,763.86  on  May  18,  2016. Similarly,  Market  Capitalization  (MC)  rose  by  3.14  per  cent  from  N8.91 trillion  to  N9.19  trillion  during  the  same  period.  However, relative to end December 2015, the indices declined by 6.56 per cent and 6.70 per cent, respectively.  Globally, however, the equities markets were generally bearish.

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/US$, with a daily average of N197/US$ between March 25th and May 13th, 2016.  The Committee, therefore, remains committed to its mandate of maintaining a stable naira exchange rate.  The  MPC  noted  the level  of  activity  in  the  autonomous  foreign  exchange  market  especially, following  the  deregulation  of  the  downstream  petroleum  sector  with attendant increased  demand in the interbank market, thus further exerting pressure on the naira.

The Committee recalls that over the last two consecutive meetings, it had signaled the imperative of reform of the foreign exchange market. In  the intervening  period,  the  Committee  interrogated  the  issues  around  the current  foreign  exchange  market  regime,  tracing  them  to  the  low  foreign exchange  earnings  of  the  economy.  Consequently,  in  the  Committee’s opinion,  the  key  issue  remains  how  to  increase  the  supply  of  foreign exchange  to  the  economy.  The  Committee  observed  that  while  the  Bank has  been  working  on  a  menu  of  options  to  ensure  increased  supply  of foreign exchange,  there  was no easy and quick fix to the foreign exchange scarcity  problem as supply remained essentially a function of exports  and the investment climate.

The  Committee  is  aware  that  a  dynamic  foreign  exchange  management framework  that  guarantees  flexibility  could  not  replace  the  imperative  for the economy to increase its stock of foreign exchange through enhanced export  earnings.  Consequently, such a structure must evolve to provide basis for radically improved investment climate to attract new investments.

The  Committee  recognizes  the  exchange  rate  as  a  very  important macroeconomic  variable,  which  must  be  earned  by  increased  productive activity and exports,  noting with satisfaction that the Bank had  made very significant and satisfactory progress with the reforms framework.

The  Committee  was  of  the  view  that  the  current  adverse  global  and domestic economic and financial conditions and the imperative imposed by the demand and supply shocks to the domestic economy and  considering the  express  intensions of Government as enunciated in the 2016 budget, policy must respond appropriately  as the  market continues  to  demonstrate confidence  in  the  Bank’s  ability  to  deliver  a  credible  foreign  exchange market. Accordingly, the MPC decided that the Bank should embrace some level of flexibility in the foreign exchange market.  Given the imperative for growth, the Management of the Bank has been given the mandate to work out the modalities for achieving the desired flexibility that is in the overall interest of the Nigerian economy and when the implementation of the new framework would begin.

The Committee’s Considerations

The  Committee  acknowledged  the  severely  weakened  macroeconomic environment,  as  reflected  particularly  in  increased  inflationary  pressure, contraction in real output and rising unemployment. The Committee recalls that in July 2015, it had hinted on the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities. Unfortunately the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output.  As  a  stop-gap  measure,  the Central Bank continued to deploy all the instruments within its control in the hope  of  keeping  the  economy  afloat.  The actions, however, proved insufficient to fully avert the impending economic contraction. With  some of the  conditions  that  led  to  the  contraction  in  Q1,  2016  still  largely unresolved,  the  weak  outlook for  growth  which was  signaled in July 2015 could  extend  to  Q2.  To  this  effect,  today’s  policy  actions  have  to  be predicated on a  less optimistic  outlook for the economy in the short term, given  that,  even  after  the  delayed  budgetary  passage  in  May  2016,  the initial  monetary  injection  approved  by  the  Federal  Government  may  not impact  the  economy  soon,  as  the  processes  involved  in  MDAs  finalizing procurement contracts before  the  disbursement  of funds  may further delay the much needed financial stimulus to restart growth.

The  Committee  noted  that  the  CBN  had  implemented  accommodative monetary policy from July 2015, with the hope of achieving growth, up until March  2016,  when  the  MPC  switched  into  a  tightening  mode.  However, while  the  underlying  conditions  necessitating  tight  monetary  policy remained largely in place, sundry administrative measures implemented by the  Bank  and  recent  macroeconomic  conditions  on  the  back  of  the  2016 Budget are expected to significantly dictate a key policy preference in the dilemma  now  faced  by  monetary  policy  -  stagflation.  Given  the  current limited policy  space, it  is  imperative to  balance stability with  growth stance while  working  on  options  that  in  the  short  term,  are  certain  to  isolate seasonal and transient factors fuelling the current price spiral.

Other than credit to government, growth in all monetary aggregates remained largely below their indicative benchmarks, yet; headline inflation spiked in April 2016, far above the upper limit of the policy reference band.

Inflation has  continued to be driven  mainly  by supply side factors such as fuel  scarcity,  increase  in  tariff  and  deterioration  in  electricity  supply, increase in the price of  petrol, higher input costs as a result of scarcity of foreign exchange, persistent security challenges and exchange rate pass through to domestic prices of import. While the Committee believed that the recent deregulation of the downstream sector of the petroleum  sector was in the right direction and  would  lead to increased supply, the  pass-through effect  of  prices  to  other  products  has  to  be  factored  in  policy considerations.  Mindful of the limitations of monetary policy in influencing structural imbalances in the economy, the Committee stressed the need for policy coordination with the fiscal authorities in order to effectively address the identified pressure points.

The  Committee  noted  that  the  continued  excess  liquidity  in  the  banking system was responsible for the low level of activity in the interbank market. This is in addition to contributing to the sustained pressure in the foreign exchange market.  The Committee expressed hope that efficient implementation of the recently passed 2016 Federal Budget, especially; the capital expenditure portion, would help invigorate growth in the economy as business confidence rejuvenates.

The Committee expressed concern over sustained pressure in the foreign exchange market and the necessity of implementing reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market.  Accordingly,  the  Committee  noted  that  it  was time  to  introduce  greater  flexibility  in  the  management  of  the  foreign exchange  market.  The  Committee  reaffirmed  commitment  towards maintenance  of  price  stability  and  reiterated  the  need  to  reappraise  the coordination  mechanism  between  monetary  and  fiscal  policy  and  initiate reforms,  for  the  purpose  of  more  efficient  policy  synchronization  and management.

The Committee’s Decisions

The Committee, in its assessment of  the  relevant  risk profiles,  came to the conclusion that although, the balance of risks  remains tilted against growth; previous  decisions  need  time  to  crystalize.  Consequently, in a period of stagflation, the policy options are very limited.  To  avoid  complicating  the conditions,  the  Committee  decided  on  the  least  risky  option  to  hold.  The foreign  exchange  market  framework,  now  ready,  the  MPC  voted unanimously  to  adopt  greater  flexibility  in  exchange rate  policy  to  restore the  automatic  adjustment  properties  of  the  exchange  rate.  Consequently, all  9  members  voted  to  hold  and introduce  greater  flexibility  in  managing the foreign exchange rate. The Bank would however, retain a small window for funding critical transactions.  Details of operation of the market would be released by the Bank at an appropriate time.

In summary, the MPC voted to:

(i)  Retain the MPR at 12.00 per cent;

(ii)  Retain the CRR at 22.50 per cent;

(iii) Retain the Liquidity Ratio at 30.00 per cent; and

(iv) Retain the Asymmetric Window at +200 and -500 basis points around the MPR