The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) said the decision to retain all monetary policy parameters as they were in May so as not to hurt output growth in the economy or exacerbate inflationary pressures.
Although the Committee expressed delight the inflation has been trending downwards, while output growth remained positive, it stressed the need for policy measures to further drive down inflation, and at the same time accelerate output growth to levels above population growth rate.
Noting the continued moderation in headline inflation (year-on-year) to 17.75 percent in June 2021 from 17.93 percent in May 2021, the third consecutive month of decline, the committee said headline inflation remained well above the CBN’s ceiling of 6-9 percent corridor.
It attributed the decrease to a marginal decline in both the food and core components to 21.72 and 13.09 per cent in June 2021 from 22.28 and 13.15 per cent in May 2021, respectively.
Also, with the recovery of both the global and domestic economies in the first two quarters of the year, the Committee said the current situation neither gives room for any adjustment in the policy rates in any direction to sustain the recovery process.
Briefing reporters at the end of the Committee meeting on Tuesday in Abuja, the CBN governor, Godwin Emefiele, explained why the Committee resolved to retain all the controlling parameters.
On tightening, he said the MPC noted that whereas this would limit excess liquidity available to
attack the foreign exchange market, it nevertheless was of the view that tightening would
reduce money supply and therefore inhibit the ability of Deposit Money Banks
(DMBs) to create credit needed to stimulate manufacturing output which
could also help to moderate prices.
On loosening, Emefiele said whereas the MPC members felt this should transmit into lower market interest rates, which could improve the ability of obligors to repay their loans and reduce non-performing loans (NPLs), they nevertheless felt loosening would not only exacerbate inflationary pressure, but would increase negative real rate of return and discourage investments in the domestic economy.
“Based on the above considerations, the MPC made the decision to hold all
policy parameters constant; believing that a hold stance will enable the
continued permeation of current policy measures in supporting the recorded
growth recovery and macro-economic stability,” the CBN governor said.
Consequently, he said the Committee decided by a unanimous vote to retain the Monetary
Policy Rate (MPR), otherwise called lending rate at 11.5 percent, with the asymmetric corridor of +100/-700 basis points around the MPR.
Also, the cash reserve ratio (CRR) was retained at 27.5 percent, and Liquidity Ratio at 30 percent.
The MPR is the controlling rate approved by the CBN for commercial banks’ lending activities for the period, while the CRR is the minimum deposit a commercial bank must hold as reserves in its account with the CBN.
Noting the recovery of the country’s economy, with real GDP growing by 0.51 percent in the first quarter of 2021, compared with 0.11 percent in the preceding quarter, the CBN governor said the fast spread of new and deadlier strains of the COVID-19 virus posed renewed downside risk.
The major drivers of the growth, he said, were in the non-oil sector, including agriculture and industry sub-sectors, with growth rates of 2.28 and 0.94 percent, respectively, while the oil sector, year-on year, contracted by -2.21 percent in first quarter of 2021, compared with -19.76 percent in the previous quarter.
The weak performance in the oil sector, he said, was attributed to several factors, including the declining quality of oil infrastructure, lack of new investment in the sector and the need to comply with the OPEC+ production quota.
The employment level index for July 2021, he said, stood at 46.5 index points, relative to
the preceding month’s figure of 45.0, but, remained below the 50.0-index point
Welcoming the sustained monetary and fiscal stimuli to revamp the domestic economy, Emefiele said the committee expressed the hope that the distribution of COVID-19 vaccines would subdue the abate the pandemic.
The Committee, he said, noted the marginal increase in the external reserves which rose
to $33.83 billion on July 22, 2021 from $32.78 billion as at June 30, 2021.
In deciding to leave the monetary policy parameters unchanged, the CBN governor said the Committee reviewed the options confronting the system in the short to medium term, by analyzing the downside risks to growth and upside risks to inflation.
It commended the continued effort by both the monetary and fiscal authorities
as well as public health agencies in stemming the spread of the pandemic and its impact,
to return the economy to the path of recovery.
The MPC expressed concern about the broad level of insecurity across the country,
noting its impact on business confidence and overall economic activities.
Also, it noted the persisting insecurity in key commodity producing areas and urged
the Federal Government to intensify security surveillance in farming
communities to ensure uninterrupted farming activities.
“The CBN will continue to release maize from its strategic maize reserve directly to feed-millers as part of its strategic response to address rising food prices and moderate the price of maize across the country,” the MPC.
On the contribution of poor infrastructure to rising domestic price levels, the committee re-iterated its call to the Federal Government to prioritize investment in public infrastructure, such as improved transportation networks, power supply and telecommunication facilities.
Funding for such projects, the Committee suggested, could be sourced through Public-Private-Partnerships, as well as the issuance of diaspora bonds.
Emphasizing the complementary role these bonds would play to boost foreign exchange supply, improving accretion to reserves and easing the exchange rate pressure.
The MPC encouraged Nigerian banks to extend more credit to consumers and firms to
enhance consumption and production activities necessary to strengthen the
Lamenting the impact of the rising levels of cost under-recovery and other obligations in the oil industry, particularly to Joint Venture Contracts, which has resulted in the persistent reduction in remittance of oil revenue to the Consolidated Revenue Fund, the Committee urged the government to continue to explore additional sources of non-oil revenue, to reduce the over
dependence on a single revenue source.
The MPC urged the CBN to continue using its existing administrative methods to rein-in inflation by the use of its discretionary CRR policy to mop-up liquidity from the banking system as the need arises.
The Committee also encouraged the apex bank to continue the use of its intervention
mechanism to deploy funds to output-stimulating and employment-generating
sectors of the economy, such as, the Targeted Credit Facility, AGSMEIS,
Agriculture and Manufacturing.