Central Bank of Nigeria Communique No 109 of the
Monetary Policy Committee Meeting of Monday and
Tuesday 19th and 20th September 2016
The Monetary Policy Committee met on 19th and 20th
September 2016, amidst persistently subdued global
and domestic economic and financial environments.
The Committee thoroughly assessed the global and
domestic macroeconomic and financial developments
and risks to the domestic economy up to September
2016, and the outlook for the last quarter of the year.
In attendance were 10 out of 12 members.

International Economic Developments
The Committee acknowledged the tepid growth
performance of global output, arising from legacy
factors, the June 23rd Brexit vote as well as contagion
from emerging markets’ weak demand and contracting
productivity. Whereas growth appears to be slowly
recovering in advanced economies, especially the
United States, the outlook remains fraught with
uncertainty as long-term government bonds have
nosedived to multi-year lows on expectations of loose
monetary policy from advanced economies and the
continued sub-optimal performance of the Euro Area,
Japan and China. Consequently, the IMF had in July
2016, further downgraded its baseline forecast for

global growth to 3.1 per cent from 3.2 in April. The
World Bank in its June 2016 Report on Global
Economic Prospects showed even less optimism with
a global output growth projection of 2.4 per cent for
2016 from the 2.9 per cent in January. The subdued
global growth prospects is traced to persistently weak
fundamentals, mainly in emerging markets and
developing economies (EMDEs), mostly due to soft
commodity prices, diminished investment, contracting
trade, weak demand and rising inflation. Volatility in
global financial markets appeared to have subsided in
the second quarter of the year, after a wild ride
following the UK Brexit vote, and against the backdrop

of less likely US rate hike expectations and some
stability in the crude oil market.
The United States (US) economy firmed up at a
seasonally-adjusted annualized rate of 1.1 per cent in
Q2 2016, although with a downward adjustment of 0.1
per cent from the first estimate of 1.2 per cent. It,
however, still represents a noticeable improvement
compared with the 0.8 per cent growth recorded in Q1
2016. The improved performance of the economy was
attributed to increased private consumption spending,
a robust labor market and increased exports, even as
retail sales and manufacturing output declined.
Japan’s economy expanded at a seasonally adjusted
annualized rate of 0.2 per cent in Q2 2016 compared

with 1.7 per cent in Q1 of 2016, against the backdrop
of weak wage growth and an external sector that is
undermined by a strong yen. Fearing that monetary
policy may be approaching its limits, the government
on 2nd August, approved a fiscal stimulus of ¥13.5
trillion (US$132 billion) in a spirited attempt to
jumpstart the economy, even as the Bank of Japan
(BOJ) dismissed market speculation that it was
planning to stop its monthly monetary stimulus
program of ¥6.7 trillion ($69.07 billion). The massive
fiscal and monetary stimuli are, however, yet to have
the desired impact.
Real GDP in the Euro area expanded by 0.3 per cent,
a significant decline compared with the 0.6 per cent

recorded in Q1 2016. Downside risks from the Brexit
vote seems to have dissipated with no attendant major
economic shock to the zone’s economy thus far. As
such, many of the conditions that had driven the
recovery remained in place, suggesting that Q3 growth
may continue in the direction of the second quarter.
Following its September 8th, 2016 meeting, the
Governing Council of the European Central Bank
resolved to leave its key interest rates on the main
refinancing operations, the marginal lending facility
and the deposit facility unchanged at 0.00, 0.25 and -
0.40 per cent, respectively. The Council also
reaffirmed its commitment to sustain the monthly asset
purchases of €80 billion (US$90.4 billion) until end of

March 2017 or until a sustained adjustment is seen on
the path of inflation, towards the 2.0 per cent policy
target.
The Bank of England (BoE), at its August 4th meeting,
and in attempts to further blunt the aftershocks of the
Brexit vote, decided to cut its benchmark interest rate
for the first time since 2009, by 25 basis points from
0.5 per cent to 0.25 per cent, the lowest ever in the
Bank’s history. The Committee voted to increase its
monthly assets purchase program financed through
the issuance of reserves by another ₤60 billion
(US$80.4 billion) from ₤375 billion (US$502.5 billion)
to ₤435 billion (US$582.9 billion). Furthermore, the
BoE revived its financial crises-era U.K. government

bond buying program financed through the issuance of
reserves, up to ₤10 billion ($13.4 billion), in effort to
stimulate the economy and steer inflation towards its
2.0 per cent target.
While major EMDEs continue to be constrained by low
capital
inflow,
the
intractable
macroeconomic
environment faced in 2015 and through to the first half
of this year is gradually abating. The prospects for
near term full economic and financial recovery in the
EMDEs remain subdued, with the IMF (WEO July
2016 Update) projected growth rate forecast for this
group of countries at 4.1 per cent, a downward review
from 4.3 projected in April. However, the resumption of

growth is expected to be powered by rising credits and
a surge in government spending.
The potential alliance between OPEC and non-OPEC
members like Russia, to reduce quota, in the face of
disruptions to production in Nigeria, Libya and Iraq,
have aided relative stability in the crude oil market.
Globally, general price levels remained tapered due to
sustained low oil and other commodity prices. In the
advanced economies, despite the uncertainties arising
from the UK referendum, accommodative monetary
policy stance of the region’s central Banks, negative
interest rate in Japan and elsewhere, as well as
various fiscal stimuli, global inflation has remained
suppressed. As deviations in macroeconomic

fundamentals in the advanced economies and the
EMDEs widen, monetary policy could continue to
diverge between the two in the short to medium term.
Domestic Economic and Financial Developments
Output
Data released by the National Bureau of Statistics
(NBS) in August indicated that the economy had
slipped into recession following another contraction in
Q2, 2016. The August 2016 data showed domestic
output in Q2, 2016 contracted by 2.06 per cent. This
represented a decline of 1.70 percentage points in
output from the -0.36 per cent recorded in Q1, and
4.41 percentage points lower than the 2.35 per cent

growth in the corresponding period of 2015. The nonoil sector contracted by 0.38 per cent, compared with
the 0.18 per cent contraction in the preceding quarter.
Agriculture;
Other
Services;
Education;
Arts,
Entertainment & Recreation; and Information &
Communication, grew by 4.53, 4.32, 2.88, 1.80 and
1.35 per cent, respectively.
The shocks associated with energy shortages and
price hikes, scarcity of foreign exchange and
depressed
consumer
demand,
among
others,
apparently proved to be more damaging than
expected. Recognizing that the conditions which
precipitated the current economic downturn were not
essentially sensitive to monetary policy interventions,

the
MPC
again
renewed
its
call
for
urgent
complementary fiscal policies to resuscitate production
and engineer aggregate consumption. In particular,
members
underscored
the
imperatives
of
diversification of the economy away from oil into
agriculture, manufacturing and services as well as
more efforts towards payment of salaries and arrears
of public sector employees particularly in states and
local
governments
to
stimulate
aggregate
consumption, as part of the overall fiscal policy menu
kit. On the supply side, efforts must be intensified at
increased capital expenditure to redress infrastructural
deficits, improve the business environment and spur
growth.

Prices
The Committee noted that headline inflation (year-onyear) rose again in August to 17.6 per cent, from 17.1
per cent in July 2016, thus maintaining the upward
trend since January 2016. The increase in headline
inflation in August reflected increases in both food and
core components of inflation. Core and food inflation
have increased from 16.93 and 15.80 per cent in July
to 17.2 and 16.43 per cent, respectively, in August
2016.
The Committee nonetheless, noted that the month-onmonth evolution of consumer price inflation has been
less phenomenal. The headline inflation index rose by

1.0 per cent in August from 1.3 per cent in July, 1.7
per cent in June; and 2.8 per cent in May 2016.
Similarly, the core index has been increasing at a
decreasing rate since May when it rose by 2.7 per
cent. It moderated to 0.85 per cent in August from 1.22
per cent in July and 1.83 per cent in June. The same
pattern of moderation is seen in the food (month-onmonth) index which rose by 1.2 per cent in August
from 1.21 per cent in July, 1.4 per cent in June and 2.6
per cent in May.
The MPC further noted that the pressure on consumer
prices continues to be associated with reform-related
legacy and structural factors including high costs of
electricity, transport, production inputs, as well as

higher prices of both domestic and imported food
products. The MPC expects that with the onset of the
harvest season, the restrictive stance of policy as well
as the flexible FX regime, prices will begin to taper in
the fourth quarter.
Monetary,
Credit
and
Financial
Markets
Developments
Broad money supply (M2) grew by 8.08 per cent in
August, 2016, compared with the July level of 10.75
per cent. When annualized, M2 grew by 12.12 per cent
in August 2016 above the growth benchmark of 10.98
per cent for 2016. Net domestic credit (NDC) grew by
20.09 per cent in the same period, annualized at 30.14

per cent. At this rate, the growth rate of NDC was
above the provisional benchmark of 17.94 per cent for
2016. The development in NDC, essentially reflected
the relative growth in credit to the private sector of
21.07 per cent in the month, annualized to 31.61 per
cent. Credit to government grew by 1.99 per cent in
August 2016, which annualized to a growth of 3.0 per
cent compared with the growth benchmark of 13.28
per cent. The growth in M2 was traced to exchange
rate effect following the depreciation of naira in the
second quarter of the year.
Money
market
interest
rates
reflected
liquidity
conditions in the economy. Average inter-bank call
rate, which stood at 15.00 per cent on 8th July 2016,

closed at 30.00 per cent on August 26, 2016. Between
July 8th and 26th August 2016, interbank call rate
averaged 24.95 per cent. The rates increased to 50.0
per cent on July 15, 2016. The sharp increase was
attributed to the drop in net liquidity during the period.
The Committee noted a decline in the equities
segment of the capital market as the All-Share Index
(ASI) fell by 3.51 per cent from 28,733.90 on July 18,
2016, to 27,725.40 on September 15, 2016. Similarly,
Market Capitalization (MC) declined by 3.55 per cent
from N9.87 trillion to 9.52 trillion during the same
period. In addition, relative to end-December 2015, the
capital market indices fell by 20.06 per cent and 3.35
per cent, respectively, reflecting the slowdown in the

economy. Overall, the capital market did not show
vulnerabilities
to
domestic
and
external
sector
developments.
External Sector Developments
The average naira exchange rate weakened at the
inter-bank segment of the foreign exchange market
during the review period. The exchange rate at the
interbank market opened at N285.25/US$ and closed
at N305.90/US$, with a daily average of N302.87/US$
between July 1st and August 26, 2016. The Committee
observed that total foreign exchange inflows through
the CBN increased by 89.14 per cent, from
US$1,092.21 million recorded in July to US$2,065.79
million in August 2016. This increase was due mainly

to receipts of foreign flows within the month. Total
outflows, however, decreased by 4.57 per cent from
US$2,728.12 million to US$2,603.35 during the same
period. In direct efforts to deepen the foreign exchange
market and stabilize the financial markets generally, a
number of policy instruments were deployed since the
last MPC meeting, including an increase in the
benchmark
interest
rate.
Complementary
administrative measures were also taken towards
achieving this goal, among which was the directive to
IMTOs to sell forex directly to Bureau de Change
Operators, in order to improve liquidity in that segment
of the foreign exchange market. While challenges
remained, the Committee expressed optimism that

with the crystallization of current policy measures,
noticeable improvements should be observed in the
financial markets.
The Committee’s Considerations
The
Committee
acknowledged
the
weak
macroeconomic performance and the challenges
confronting the economy, but noted that the MPC had
consistently called attention to the implications of the
absence of robust fiscal policy to complement
monetary policy in the past. The Committee also
assessed the impact of its decision to tighten the
stance of monetary policy by raising the MPR in July
2016. At the time, the Committee understood the
complexity of the challenges facing the economy and

the difficulty of arriving at an optimal policy mix to
address rising inflation and economic contraction,
simultaneously. The Committee also recognized that
monetary policy had been substantially burdened
since 2009 and had been stretched. The Committee
noted that new capital flows into the economy,
approximately US$1 billion, had come in since July,
while
month-on-month
inflation
has
declined
continuously
since
May
2016.
Against
this
background, members reemphasized the need to
prioritize the use of monetary policy instruments in
dealing essentially with stability issues around key
prices (consumer prices and exchange rate) as
prerequisites for growth.

The MPC noted that stagflation is indeed a very
difficult economic condition with no quick fixes: having
been imposed by supply shocks as well as fiscal and
current account (twin) deficits. Consequently, the
policy framework must be reengineered urgently to
provide a lever for reversing the negative growth trend.
While the imperative for ensuring financial system
stability remains, the MPC reiterated the fact that
monetary policy alone cannot move the economy out
of stagflation.
The MPC considered the numerous analysis and calls
for rates reduction but came to the conclusion that the
greatest challenge to the economy today remains
incomplete fiscal reforms which raise costs, risks and

uncertainty. The calls came mainly from the believe
that reducing interest rates will spur credit growth, not
only in the private sector but also by the public sector,
which
will
help
provide
liquidity
to
stimulate
consumption
and
investment
spending.
The
Committee was of the view that in the past, the MPC
had cut rates to achieve the above objectives; but
found that rather than deploy the available liquidity to
provide credit to agriculture and manufacturing
sectors, the rate cuts provided opportunities for
lending to traders who deployed the same liquidity in
putting pressure on the foreign exchange market
which had limited supply, thus pushing up the
exchange rate.

With respect to providing opportunity to the public
sector to borrow at lower rates to boost consumption
and investment spending, the Committee agreed that
while it was expected to stimulate growth through
aggressive spending, doing so without corresponding
efforts to boost industrial output by taking actions to
deepen foreign exchange supply for raw materials will
not help reduce unemployment nor would it boost
industrial capacities. The Committee was also of the
view that consumer demand for goods which will be
boosted through increased spending may indeed be
chasing too few goods which may further exacerbate
the already heightened inflationary conditions. The
urgency of a monetary-fiscal policy retreat along with

trade and budgetary policy, to design a comprehensive
intervention mechanism is long overdue.
The Bank has since 2009 expanded its balance sheet
to bail out the financial system and support growth
initiatives in the economy. While stimulating economic
growth and creating a congenial investment climate
always is and remains essentially the realm of fiscal
policy; monetary policy in all cases only comes in to
support sound fiscal policy. Nevertheless, the Bank
has and shall continue to deploy its development
finance interventions to complement the overall effort
of fiscal policy towards reinvigorating the economy.
The interest rate decisions of the Bank are, therefore,

anchored on sound judgment, fundamentals and
compelling arguments for such policy interventions.
The Committee also feels that there was the need to
continue to encourage the inflow of foreign capital into
the economy by continuing to put in place incentives to
gain the confidence of players in this segment of the
foreign
exchange
market.
Consequently
the
Committee considers that loosening monetary policy
now is not advisable as real interest rates are
negative, pressure exists on the foreign exchange
market while inflation is trending upwards.
The Committee noted the positive response of the
deposit money banks (DMBs) to the Bank’s call for
increased credit to the private sector between July and

August. As the growth in the monetary aggregates
spiked above their provisional benchmarks, headline
inflation continued its upward trajectory in August
2016, and now close to twice the size of the upper limit
of the policy reference band. Supply side factors
including energy and utility prices, transportation and
input costs, have continued to add to consumer price
pressures. Members emphasized that improved fiscal
activities, especially, the active implementation of the
2016 Federal Budget, and payment of salaries by
states and local governments, will go a long way in
contributing to economic recovery. In the same
direction, the Committee urged the fiscal authorities to

consider tax incentives as a stimulus on both supply
and demand sides of economic activities
Outlook
The data available to the Committee and forecasts of
key variables suggest that the outlook for inflation in
the medium term appears benign. First, month-onmonth inflation has since May 2016 turned the curve;
second, harvests have started to kick-in for most
agricultural
produce
and
should
contribute
to
dampening consumer prices in the months ahead; and
third, the current stance of monetary policy is expected
to continue to help lock-in expectations of inflation
which, has started to improve with the gradual return
of stability in the foreign exchange market. In this light,

the MPC believes that as inflows improve, the naira
exchange rate should further stabilize. Overall, the
major pressure points remain the challenges in the oil
sector (production and prices), output contraction, and
other financial system vulnerabilities as well as foreign
exchange shortage.
The Committee’s Decisions
The Committee assessed the relevant risks, and
concluded that the economy continues to face
elevated risks on both price and output fronts.
However, given its primary mandate and considering
the limitations of its instruments with respect to output,
the Committee elected to retain the current stance of

policy. Conscious of the need to allow this and other
measures like the foreign exchange market reforms to
work through fully, the Committee decided to retain all
the monetary policy instruments at their current levels.
In summary, all 10 MPC members voted to:
(i) Retain the MPR at 14.00 per cent;
(ii) Retain the CRR at 22.5 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent;
and
(iv) Retain the Asymmetric Window at +200 and
-500 basis points around the MPR
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
20th September 2016