Communiqué No. 65 of CBN`S Monetary Policy Committee

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The Monetary Policy Committee (MPC) met today to address the

challenges faced by the Nigerian economy against the backdrop of

recent domestic and international economic and financial


External Environment
The Committee noted at the outset that recessionary conditions in many

developed economies seem to be abating. However, there still exists

considerable uncertainty as to when economic recovery would set in on

a sustained basis. In recent weeks, there has been some improvement

in the price of crude oil in international markets. While this

development augurs well for Nigeria's fiscal and external sector

positions, its sustainability would, however, depend on how quickly the

global economy would bottom out of the current recession. Inflation

rates have so far been very low in developed countries, making it

possible for central banks to maintain record low levels of interest

rates. However, unemployment rates continue to be high and the

financial system is still not adequately capitalized. Other emerging

countries too have recorded economic slowdown and relatively low

inflation. They are, however, recovering at an improved rate and their

financial and foreign exchange markets have been functioning well.

Key Domestic Developments
The latest estimates of the National Bureau of Statistics (NBS) for 2008

and 2009 show a moderation in the rates of real GDP growth. The

revised growth rate for 2008 is put at 5.99 per cent as against an earlier

estimate of 6.41 per cent. For 2009, the NBS has projected growth at

5.33 per cent compared with an earlier projection of 5.75 per cent. In

the first quarter of 2009, growth was in the order of 4.50 per cent

compared with 4.64 per cent in the first quarter of 2008. In the second

quarter of 2009, however, output growth is estimated at a higher level

of 6.73 per cent compared with 5.65 per cent in the second quarter of

2008. This was largely due to the contributions of agriculture,

wholesale and retail trade and a growth in the relative contribution of

crude petroleum and natural gas production from -1.72 to 0.57

percentage point. Against this background, the Committee noted the

increased agricultural output and the expected improvement in the

output of crude petroleum and natural gas will augur well for

dampening inflation expectations.
The Committee noted that the headline (year-on-year) inflation has

been stable at a little over 11 per cent as at July 2009. The average rates

of headline inflation and food inflation in the first seven months of

2009 were respectively 13.11 per cent (11.53 per cent in 2008) and

15.94 per cent (15.98 per cent in 2008). Given the outlook on output

and limited aggregate demand, the staff assessment is that at the end of

the year, the headline inflation would moderate further. However,

should there be any reversal in the movement of inflation, appropriate

policies would be adopted at the next MPC meeting. The main risk to

inflation comes from core inflation with higher oil prices and possible

removal of subsidies combining with the usual growth of spending

around the Christmas festive season.
Monetary Developments
Provisional data for broad money (M2) for July 2009 showed a growth

of 10.2 per cent on a year-on-year basis, the lowest for any month since

February 2006. This largely reflected the decline in net foreign assets

(NFA) and sharp deceleration in the growth of credit to private sector.

The Committee noted that recent improvements in oil output and prices

would help to improve the gross foreign exchange reserves of the

economy. However, it underscored the importance of continuing with

the efforts at improving the macroeconomic climate for attracting

foreign capital inflows and spurring growth of private credit for

productive purposes.
Interest Rates and Financial Markets
With the reduction of the Monetary Policy Rate and the introduction of

the interest rate corridor as well as Central Bank's guarantees of

unsecured inter-bank market transactions which were firmly set,

effective July 20, there has been considerable improvement in the risk

perceptions of market participants. The spread between the unsecured

call rate and the secured open buy-back (OBB) rate has since then

come down significantly and averaged 430 basis points compared with

the average spread of 1384 basis points between July 1 and July 17 and

the average spread of 1115 basis points in June 2009. The coupon rates

on dated government securities in the primary market have tended to

move downwards.
The overnight inter bank rate was 4.11 per cent as at 28th August, 2009.

In general, this implied a massive reduction in the interbank rates since

the last MPC meeting. However, the translation of this reduction into

rates on purchased funds and lending rates seems to be delayed. Both

rates are being monitored on an on-going basis.
Exchange Rates and Foreign Exchange Reserves
The foreign exchange market has in general been relatively stable with

the re-introduction of the wholesale Dutch auction system and the

measures taken to further liberalize the inter-bank market since the last

meeting of the MPC. There has also been reduction in exchange rate

volatility. The spread between the rates at which the auctions had been

settled and the rates quoted by BDCs has narrowed from about 12 per

cent to 4.4 per cent. In the view of this, the spread would narrow further

once the confidence in the international foreign exchange markets is

fully restored with the bottoming out of the current global recession,

and more BDCs are being brought into the market.
Foreign exchange reserves as at August 28, 2009 stood at US $41.597

billion. The Committee believes that the recent improvement in the

output of oil and the price of crude oil in international markets should

help improve the external reserves position towards the end of the year.

Perspectives and the Stance of Policy
Against the backdrop of signs of gradual improvement in the external

economic environment and the positive outlook for the domestic

economy, the Committee felt that policy initiatives are needed to

further improve growth without jeopardising price and financial

stability. It will, therefore, continue to manage liquidity actively to

ensure that credit requirements are taken care of at reasonable interest

rates while monitoring the trends in prices. The Committee will also

pursue an interest rate policy that is consistent with price and financial

stability and supportive of enhancing the levels of economic activity on

a higher trajectory.
On foreign exchange, the policy stance remains that exchange rate

should be principally market driven, but interventions will be made to

mitigate tendencies towards volatility and to counteract speculative

attacks on the national currency.
In the light of the above, the Monetary Policy Committee decided to:

a) keep the MPR unchanged at 6 per cent per annum;

b) maintain the interest rate corridor at +/- 2 per cent around the

MPR; and
c) Approve in principle the establishment of an “Asset Purchase

Facility Fund”.
The Central Bank of Nigeria and Federal Ministry of Finance to jointly

consider the modalities for setting up the APF Fund for effective

liquidity injection and credit easing targeted at specific areas of the

Sanusi Lamido Sanusi
Central Bank of Nigeria

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