Monetary Policy | |
Monetary Policy | |
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Tuesday, September 25, 2018 06.10 PM / Central Bank of Nigeria
Background
The Monetary Policy Committee (MPC) met on the 24th
and 25th of September, 2018 and evaluated developments in the global
and domestic economic and financial environments in the first eight months of
2018, as well as the outlook for the rest of the year. Ten members of the
Committee were in attendance.
Global Economic Developments
The Committee noted the uneven expansion in global
output amidst growing trade tension, rising oil prices and debt levels as well
as currency depreciation in most of the notable emerging markets and developing
economies. These developments notwithstanding, there was evidence of resilient
financial markets and output growth in the advanced economies led by the United
States, which experienced sharp improvements in output growth. In the Euro
area, United Kingdom and Japan, the pace of growth was moderate but steady,
while in the Emerging Markets and Developing Economies (EMDEs), growth was
sluggish and relatively uneven.
Growth in the advanced economies was projected to
remain at 2.4 per cent in 2018, same as in 2017, led by the US which grew by
4.1 per cent in Q2 2018 and is projected to grow by 2.9 per cent in 2018. The
Euro area and Japan, grew by 0.4 and 0.7 per cent, respectively, in Q2 and are
projected to grow by 2.2 and 1.0 per cent, respectively, in 2018. In the
EMDEs and Developing Economies, growth is expected to remain strong at 4.9 per
cent in 2018 compared with 4.7 per cent in 2017. Growth in the EMDEs is
expected to be led by India and China, which are projected to grow by 7.3 and
6.6 per cent, respectively, in 2018.
On average, the momentum of the global economy
remained on track towards achieving the 2018 growth projections of 3.9 per cent
as financial conditions remain broadly favourable with limited spill over of
trade tensions amongst the general political sentiments. However, the recent
episodes of large-scale flooding in major areas across the globe could pose
some threat to growth.
Accordingly, the MPC believes that rising oil prices,
tighter financial conditions, higher yields in the advanced economies and
capital flow reversal from the EMDEs, resulting in pressure on currencies of
some countries with fragile conditions, as well as growing trade tensions
between the US and China, would continue to shape developments in the EMDEs in
the medium term.
Domestic Output Developments
Available data from the National Bureau of Statistics
(NBS) showed that real GDP growth declined by 45 basis points as the economy
grew by 1.50 per cent in the second quarter of 2018, down from 1.95 per cent in
the preceding quarter, but higher than 0.72 per cent in the corresponding
quarter of 2017. The growth slowdown was traceable to contraction in the
oil sector in the second quarter of 2018, compared with the previous quarter.
The Committee noted that non-oil real GDP grew by 2.05 per cent, reflecting the
strong performance of construction, services and agriculture, which grew, by
7.66, 4.19 and 1.19 per cent, respectively. Furthermore, the non-oil sector was
similarly supported by the stability in the foreign exchange market, continued
implementation of the 2017 capital budget and the on-going interventions of the
Bank in the real sector of the economy.
The MPC was of the view that even though growth
remained weak, the effective implementation of the 2018 FGN capital budget and
policies that would encourage credit delivery to the real sector of the economy
would boost aggregate demand, stimulate economic activity and reduce
unemployment in the country.
Developments in Money and Prices
The Committee noted that relative to the level at end-December 2017, Broad Money
(M2) grew by 2.98 per cent in August 2018, annualised to 4.47 per cent, but
below the provisional benchmark of 10.48 per cent for 2018. The
growth in M2 was largely driven by growth in Net Foreign Assets (NFA) of 18.63
per cent in August 2018, annualised to 27.94 per cent and above the provisional
growth benchmark of 18.15 per cent for the year. Net Domestic Credit (NDC),
however, contracted by 4.18 per cent, annualized to 6.27 per cent, in contrast
to the growth benchmark of 12.45 per cent for 2018. The contraction in NDC was
attributed to the 34.68 per cent contraction in net credit to the Government in
August 2018. Conversely, credit to the private sector grew marginally by 0.81
per cent in August 2018 from a contraction of 0.13 per cent in July 2018,
annualized to 1.21 per cent, against the annual benchmark of 5.64 per cent.
The MPC observed that despite the under-performance of
key monetary aggregates, headline inflation (year-on-year) inched up to 11.23
per cent in August 2018, from 11.14 per cent in July 2018. The rise in headline
inflation was from food, while core inflation declined, indicating that supply
side factors were driving the price increase. The near-term upside risks to
inflation remained the dissipation of the base effect, expected 2019 election-related spending, continued
herdsmen attack on farmers and the current episodes of flooding which has
destroyed crops and would affect food supply and prices. In this regard, the
Committee urged the fiscal authorities to ensure sustained implementation of
the 2018 budget to relieve the supply side growth constraints, as well as
address the flooding incidence which has become perennial, on a permanent
basis.
The average inter-bank call rate declined from 9.0 per
cent in July 2018, to 4.0 per cent on September 20, 2018. Similarly, the
average Open Buy Back (OBB) rate declined from 11.44 to 4.72 per cent over the
same period. The relative decline in market rates reflected the increased
statutory allocations to states and local governments and maturing securities.
The development did not significantly transmit to retail interest rates as
average maximum lending rates marginally declined to 30.93 per cent in August
from 31.09 per in July 2018. Similarly, average prime lending rate decreased to
16.65 per cent in August from 16.83 per cent in July 2018. The weighted average
deposit rate also declined to 4.57 per cent in August from 4.79 per cent in
July 2018, widening the spread between the average lending rate and weighted
average deposit rate to 26.36 per cent in August 2018 from 26.30 per cent in
July 2018.
The Committee noted the decrease in external reserves
to US$44 billion on September 20, 2018 from US$45 billion at the end-July 2018.
Total foreign exchange inflow through the economy fell by 38.34 per cent to
US$6.00 billion in July from US$9.73 billion in June 2018. The Committee
believes that accretion to external reserves should strengthen in the last
quarter of 2018, with crude oil price remaining above the budget benchmark
price of US$51.00 per barrel and oil production increasing to 2.3 million
barrels per day.
The Committee, noted the relative stability in both
the Investors’ and Exporters’ (I&E) window of the foreign exchange market,
which was sustained by autonomous inflows and measures taken by the Bank to
deepen the foreign exchange market and curb speculative practices.
The MPC expressed concern at the decline in major
capital market indices. The All-Share Index (ASI) decreased by 14.99 per cent
to 32,540.17 on September 21, 2018 from 38,278.55 at end-June 2018. Similarly,
Market Capitalization (MC) decreased by 14.33 per cent to N11.38 trillion on
September 21, 2018 from N13.87 trillion at end-June 2018. The development
was due largely to sustained profit-taking by portfolio investors and capital
reversals as foreign yields become increasingly more attractive.
The Overall Outlook and Risks
Available data and forecast of key macroeconomic
indicators show a positive outlook for the economy in the third quarter of 2018.
The Committee expects that sustained implementation of the 2018 budget,
improvements in the security situation and sustained stability in the foreign
exchange market will stabilize prices and strengthen economic growth. Growth in
the non-oil sector, especially agriculture, manufacturing, services and light
industries are expected to drive output growth over the medium term. The
Committee, however, identified the downside risks to the outlook to include:
the impact of increased monetary policy normalization in the advanced economies
and the strengthening US dollar. Others are: the late implementation of the
2018 budget, weakening demand and consumer spending, build-up in contractor
debt, low minimum wage, impact of flooding on agricultural output and other
economic activities, continuing security challenges across the North-East and
North-Central zones, and growing level of sovereign debt.
The outlook for the year, however, remains positive as
the economy is projected to grow by 1.75 per cent
in 2018, anchored on continued stability in the foreign exchange market,
sustained high price and production of oil and improved electricity
supply.
Inflation outlook suggests a mild resurgence of
inflationary pressure in the economy, traceable largely to cost-push factors,
election related spending, amongst other domestic factors. The moderating
factors to the outlook would include; improved power supply, increased
expenditure on capital projects and improved security conditions, all of which
may exert downward pressure on consumer prices in the near-term.
The Considerations of
the Committee
The Committee appraised the macroeconomic environment
and noted that at its July meeting, modest stability had been achieved in key
indicators, including inflation, exchange rate and external reserves. In
particular, relative stability had returned to the foreign exchange market,
buoyed by a robust level of external reserves with inflation trending downwards
for the 18th consecutive month. These gains so far achieved appear
to be under threat of reversal, following new data which provides evidence of
weakening fundamentals. The Committee identified rising inflation and pressure
on external reserves created by capital flow reversal as the current challenges
to growth. It noted that inflationary pressures have started rebuilding and
capital flow reversals have intensified as shown by the bearish trend in the
equities market even though the exchange rate remains very stable.
The Committee was concerned that the exit from
recession may be under threat as the economy slowed to 1.95 and 1.50 per cent
in Q1 and Q2 2018, respectively. The Committee noted that the slowdown emanated
from the oil sector, with strong linkages to employment and growth in other key
sectors of the economy. In this regard, the Committee urged government to take
advantage of the current rising oil prices to rebuild fiscal buffers,
strengthen government finances in the medium term and reverse the current trend
of decline in output growth. The MPC also called on the fiscal authorities to
intensify the implementation of the Economic Recovery and Growth Plan (ERGP) to
stimulate economic activity, bridge the output gap and create employment.
The Committee noted that disruptions to the food
supply chain in major food producing states due to the combined effects of poor
infrastructure, flooding and the on-going security challenges resulted in a
rise in food prices, contributing to the uptick in headline inflation. The
Committee was, however, optimistic that as harvests progress in the coming
months, pressure on food prices would gradually recede, while growth enhancing
measures would over the medium term have some moderating impact on food prices.
The MPC expressed concern over the potential impact of
liquidity injections from election related spending and increase in FAAC
distributions which is rising in tandem with increase in oil receipts.
The Committee was concerned with the rising level of
non-performing loans in the banking system, traced mainly to the oil sector and
urged the Bank to closely monitor and address the situation. It also expressed
concern over the weak intermediation by Deposit Money Banks and its adverse
impact on credit expansion and investment growth by the private sector.
In view of the above developments, the MPC noted that
the economy was still confronted with growth headwinds and inflationary
pressures. It reiterated the need for synergy between monetary and fiscal
policies as a viable option for macroeconomic stability. The Committee,
therefore, identified two likely policy options as tightening or maintaining
the status quo ante. Tightening would tame inflationary pressures, stem the
reversal in portfolio capital, improve the external reserves position and
maintain stability in the foreign exchange market. Conversely, the MPC felt
that raising rates would further weaken growth as credit would become more
expensive, NPLs would increase further, leading to a deceleration in output. In
the Committee’s opinion, the upward adjustment would not only signal the Bank’s
commitment to price stability but also its desire to maintain positive real
interest rates.
A decision to hold all policy parameters constant
would sustain gradual improvements in output growth, maintain the current
monetary policy stance and await a clearer understanding of the quantum and
timing of liquidity injections into the economy before deciding on possible
adjustments. The MPC, however, called on the government to fast track the
implementation of the 2018 budget to help jumpstart the process of sustainable
economic recovery, and to facilitate passage of the Petroleum Industry Bill in
order to increase the contribution of the sector to overall GDP.
The Committee’s
Decision
In light of the above,
the MPC decided by a vote of seven (7) members to retain the MPR at 14 per
cent. However, three (3) out of these seven (7) members voted to raise the Cash
Reserve Requirement (CRR) by 150 basis points, an indication that left to them,
we should have tightened. The other three (3) members voted to tighten by
raising the MPR by 25 basis points.
In summary, the MPC voted to:
Thank you.
Godwin I.
Emefiele
Governor, Central
Bank of Nigeria
25th September 2018
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