The Monetary Policy Committee ends its two-day meeting on Tuesday, March 24, saying that banking stability indicators in the country is showing robustness. It also frowns at the increasing inflationary trend since January and the dollarisation in the economy
| By Maureen Chigbo | Apr. 6, 2015 @ 01:00 GMT |
THE Monetary Policy Committee, MPC, is worried about the hike in inflation in the country. Headline inflation has remained within the 6.0—9.0 per cent band established by the Central Bank of Nigeria, CBN. But the MPC which met from Monday, March 23, to Tuesday, March 24, noted with concern, the gradual increase in the year on year headline inflation during the first two months of the year from 8.0 per cent in December 2014 to 8.2 per cent in January and further to 8.4 per cent in February 2015. The underlying inflationary pressures came largely from food (particularly imported food) and the core components. Food inflation rose from 9.2 per cent in December 2014 to 9.4 per cent in February 2015 while core inflation increased from 6.2 to 7.0 per cent during the same period. The major risks to inflation, the Committee noted, include elevated aggregate spending in the run-up to the 2015 general elections, the likely higher import prices on the strength of an appreciating dollar and possible food supply shocks linked to insurgency and insecurity in some major agricultural zones of the country.
The MPC, in its communique made available to Realnews, said Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) declined by 1.70 per cent in February 2014 over the level at end-December 2014. This translated to an annualised decline of 10.23 per cent compared with the provisional growth benchmark of 15.24 for fiscal 2015. The decline in M2 primarily reflected the contraction of 18.14 and 8.22 per cent in net foreign assets, NFA, and other assets (net), respectively, during the period. The fall in NFA is attributed to the combined effects of weakening oil price and reversal of portfolio capital flows. During the period, net domestic credit, NDC, grew by 9.89 per cent in February 2015, annualised to a growth rate of 59.31 per cent, compared with a growth rate 7.89 per cent recorded in the corresponding period of 2014, and an indicative benchmark of 29.3 per cent for 2015. The credit-to-government (net) component grew sharply by 54.69 per cent relative to a decline of 21.81per cent at end-December 2014.
The MPC said that money market interest rates were relatively volatile in the intervening period but stabilised on average during the first two months of 2015, as banking system liquidity fluctuated. Thus, average inter-bank call and OBB rates, which opened at 10.58 and 10.52 per cent on January 5 and 6, 2015, closed at 11.00 and 9.23 per cent, respectively, on February 27. Average inter-bank call and OBB rates for the period were 15.21 and 18.36 per cent, respectively.
The committee observed that the bearish conditions in the capital market continued in the review period. The All-Share Index, ASI, decreased by 13.1 per cent from 34,657.15 at end-December 2014 to 30,103.81 by February 27, 2015. Market capitalisation also moved in the same direction, falling by 12.5 per cent from N11.48 trillion to N10.04 trillion during the period. The committee noted that the situation, though reflecting current trends globally, needed to be monitored closely.
On external sector developments, the MPC said that following the closure of the Retail Dutch Auction System, RDAS, window of the foreign exchange market on February 18, the foreign exchange market is now unified. “Consequently, the naira exchange rate opened at N180.1/US$ and closed at N198.0/US$, with a daily average rate of N198.0/US$. This represented a depreciation of N17.9k or 9.04 per cent for the period.”
The committee expressed satisfaction with the impact of the decisions taken to harmonise the foreign exchange market. As a consequence of those actions, the interbank exchange rate has stabilised after an initial adjustment. The committee, however, expressed concern about the wide divergence between the interbank and the bureau-de-change exchange rates, which provides an avenue for arbitrage and speculative activities in the market. The committee noted with concern the phenomenon of currency substitution and partial dollarisation in the economy, a development which may have significantly fuelled the high demand for foreign exchange. The Committee, therefore, reiterated that the naira remained the currency of transaction in the economy and advised the Bank to take all possible measures to address this development. The Committee also expressed concern about the outlook for growth, which had moderated partly due to the effects of low oil prices, naira exchange rate depreciation, and election-related concerns. It was, however, optimistic that the situation would improve once elections were successfully conducted with the expected improvement in business confidence.
The MPC noted that while adverse developments in international oil prices had affected government revenues and reserves accretion and impacted negatively on capital flows, the financial system remained stable with key banking stability indicators showing robustness. In the light of this, the Committee directed the Bank to take all necessary measures to improve the resilience of the financial system as well as the overall economic environment and functioning of the financial markets.
The Committee also took note of the administrative measures implemented by the Bank since the last meeting of the MPC to achieve stability in the foreign exchange market. The Bank had on 18th February 2015 taken the bold supply management measures to close the official window of the foreign exchange market in order to create transparency and minimize arbitrage opportunities in the foreign exchange market. Furthermore, to deepen the market and enhance the efficacy of the demand management measures, the Bank gave specific directives on the effective monitoring and repatriation of both oil and non-oil export proceeds. In addition, the utilisation of export proceeds has been restricted to eligible transactions only, to minimise leakages. The Committee enjoined the Bank to continue to fine-tune demand management measures as well as implement appropriate supply-enhancing strategies to ensure effective demand and utilization of foreign exchange in the country.
The Committee noted the gradual rise in headline inflation, driven mainly by exchange rate-induced high prices of imported (processe
d) food and output supply shocks. However, the Committee was of the view that the prevailing tight monetary policy stance and some of the recent administrative measures would among others help to lock-in inflation expectations and further stabilize the naira exchange rate.