The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday unanimously decided to retain the Monetary Policy Rate (MPR) at 12.0 per cent with interest rate corridor of +/- 200 basis points. The clear impact of previous tightening on the rate of inflation and exchange rates up to February 2012 were considered by the Commitee in decidingn to retain this rate.
CBN Governor, Mallam Sanusi Lamido Sanusi, who announced the rate at the end of the Committee’s meeting added that the MPC also decided to retain the Cash Reserve Ratio (CRR) at 8.0 per cent and also retain the minimum liquidity Ratio of 30.0 per cent.
In arriving at its decision, Sanusi said the MPC was faced with a choice between two options. “One option was to consider, in view of the improving global economic environment, a moderation in headline inflation, slowdown in monetary aggregates and fiscal spending and the crowding out effects of high interest rates, a reduction in the policy rate.”
Hew noted that this argument was rejected on the basis of a number of factors including the persistent underlying core inflationary pressures, the need to continue supporting the naira and build up external reserves, the necessity for attracting and retaining foreign investment and the need for consistency and stability in the macroeconomic environment.
The MPC is also concerned about the rising level of domestic debt and its sustainability, as shown by the average debt service to revenue ratio of 17.6 per cent in the last three years.
This rising domestic debt profile the MPC believes “would likely have a negative impact on domestic interest rates and the flow of credit to the core private sector, among others. Although debt to GDP ratio in 2011 stood 17.8 per cent the Committee noted that the percentage of debt service to government revenue was a high 19.1 per cent in the same year.”
In view of the high interest rate environment occasioned by tight monetary policy stance, a moderation in government borrowing would be positive not just for the fiscal position but for access to finance by the private sector. The CBN was advised to maintain its clear focus on price stability as “it is not evident that a moderation in February is sufficient to establish a trend, and warrant a reversal of monetary tightening,” Sanusi said.
Sanusi also noted that the MPC resolved to watch closely developments with respect to the fiscal stance and to respond appropriately if, and when, the need arises. To arrive at this decision the MPC noted that the underlying inflationary pressure from supply shocks would have been more severe had there been no mitigating factors on the demand side.
It was also discovered that aggregate credit and broad money (M2) have been on the decline and there are signs of improving fiscal position with some control over expenditure and no imminent increase in wages.
Government’s fiscal position and the absence of second-round effects of fuel subsidy removal Sanusi said “complemented the monetary stance to dampen demand. The situation is further supported by stable exchange rates and stable international commodity prices which combine to moderate imported inflation.”
The Committee, the governor added “recognized that in light of increasingly benign global environment, it is imperative to ensure that the current growth path is sustained. It noted the relative stability in the foreign exchange market as well as the modest accretion to external reserves during the period.”
In view of the poor accretion to reserves in 2011 and the need to continue to build buffers for the economy in an uncertain environment, the MPC Sanusi pointed out endorsed the stance of the CBN to focus on building reserves, defending the stability of the currency and providing conditions that are conducive to the inflow of Foreign Direct Investment (FDI).
The Committee noted with satisfaction the introduction of some fiscal and structural measures that could improve the revenue base of the government as well as enhance the capacity of the domestic economy to improve the value chain in the production process. Some of these measures include introduction of cost reflective electricity tariffs and progress in agricultural transformation initiatives.
These measures he said “would have a salutary effect on the fiscal position, they may, in the short run, put pressure on domestic prices.” Consequently he called “for both monetary and fiscal authorities to put in place coordinated measures that would moderate the increase in the general level of domestic prices in the short to medium term.”
After reviewing the overall fiscal position the committee commended the fiscal authorities for the discipline being introduced into government spending, the tightening of fiscal controls and the renewed focus on spending on capital projects.

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