Central Bank of Nigeria Communiqué No. 85 of the Monetary Policy
Committee Meeting of Monday and Tuesday, September 17 and 18,

The Monetary Policy Committee (MPC) met on September 17 and
18, 2012, with 10 out of the 12 members in attendance. The
Committee reviewed the conditions and challenges that confronted
the domestic economy during the first eight months of 2012 against
the
backdrop
of
international
economic
and
financial
developments with a view to reassessing monetary policy options in
the short-to- medium term.
The International Economic Developments
The Committee noted that the global economy showed signs of
further weakness in the last three months, with the latest data not
showing any evidence of improvement up to the beginning of the
third quarter of 2012. The Committee also observed that the weak

growth resulted from considerable financial market fragilities in the
euro area with resultant negative spillover effects to other regions,
uncertainty resulting from the Eurozone crisis as well as poor
macroeconomic performance in other advanced economies.
Rising food and energy prices is also a contributory factor.
In July 2012 IMF World Economic Outlook (WEO) update projected
that global output would moderate to 3.5 per cent in 2012, which is
0.1 percentage point lower than the forecast of April 2012. Growth in
advanced economies was projected to decline from 1.6 per cent in
2011 to 1.4 per cent in 2012, with the slowdown being most severe in
the peripheral economies, where the dampening effects and
uncertainty from tighter financial conditions are strongest.
In the US, real GDP grew at an annualized rate of 1.5 per cent in Q2
of 2012, down by 0.5 percentage point from 2.0 per cent in Q1. The
sluggish
growth
was
primarily
due
to
declining
aggregate
consumption, government spending, and negative terms of trade.
The euro zone is on the brink of a double-dip recession following the
contraction in output between April and June. Real output across

the 17-nation bloc fell by 0.2 per cent in Q2 of 2012 while signs of
further contraction are in the horizon. Rising unemployment and
large scale fiscal retrenchment coupled with increased taxes in a
number of countries constrained aggregate demand leading to cutback on investment and low export growth. Unemployment level
across the zone has attained a record high of 11.3 per cent, the
highest since 1995, with Spain recording the highest level and Austria
the least. Weak financial markets and the persisting sovereign debt
crisis as well as rising energy prices led the European Central Bank
(ECB) to retain its main refinancing interest rate at 0.75 per cent. EU
members remain cautious about the ECB’s Outright Monetary
Transactions scheme, which is based on strict adherence to austerity
measures and fiscal consolidation pact.
In Asia, most economies recorded significant slowdown in economic
activity up to Q2 of 2012, mainly on account of weakening exports
and investment. Export growth has moderated, reflecting the
sluggish demand from Europe while investment remained weak due
to heightened volatility of capital flows and the lagged effects of

tighter domestic monetary policies. China’s real GDP growth slowed
to 7.6 per cent in Q2 from 8.1 per cent in Q1 due mainly to decline in
net exports. Growth moderated in Japan especially in Q3 due to
softening in manufacturing activity. India’s real GDP, year-on-year,
moderated to 5.5 per cent in Q2 of 2012 from 6.1 per cent in Q4 of
2011, mainly as a result of deceleration in private consumption.
Overall, the growth trajectory for the remainder of the year tends
toward a downturn, as downside risks, including weak external
demand, elevated price levels, widening twin deficits, falling
investments, and rising interest rates, remain heightened.
Robust economic activities in the MENA and Sub-Saharan Africa
regions would partly offset the declining output growth in the
advanced and emerging markets in 2012. Real GDP growth was
projected at 5.0 per cent in each of the regions, underpinned by
strong natural resources prices, new natural resources exploration
and production in several countries, recovery from drought in the
Sahel and parts of Eastern Africa, strong post-conflict recovery in
some countries, improved governance practices and growing

disposable income. Despite these developments, growth in the
regions faces significant downside risks on the back of increased
global uncertainties.
The Committee believes that the recent quantitative easing
measures by the European Central Bank and the US Federal Reserve
System could be responsible for the high crude oil prices in the
international market. It highlighted the possible increase in carry
trade and the risk of a bubble in the domestic capital market.
Domestic Economic and Financial Developments
Output
Recent macroeconomic data indicates that the economy is
performing better than forecasts although growth in the first two
quarters of 2012 has remained consistently below the corresponding
growth rates in 2011. The provisional real GDP growth rate from the
National Bureau of Statistics stood at 6.28 per cent in Q2 of 2012, up
from 6.17 per cent in Q1 2012 but lower than the 7.61 per cent
recorded in the corresponding period of 2011. The non-oil sector

remained the major driver of growth recording a 7.50 per cent
increase in contrast to the oil sector, which contracted by 0.73 per
cent during the period. Overall GDP growth for fiscal 2012 has been
revised upwards to 6.77 per cent from the earlier projection of 6.50
per cent. The Committee welcomed the promising growth
performance although it expressed concern that the overall output
growth projection for 2012 is still lower than the 7.45 per cent
recorded in 2011.
The growth drivers within the non-oil sector remained agriculture;
wholesale and retail trade; and services; which contributed 1.94,
1.69, and 3.16 per cent, respectively. The Committee noted that the
relatively robust growth projections despite the slowing global
economy
reflected
the
continuing
favorable
conditions
for
increased agricultural production, improved security situation and
power supply.
Prices
The Committee observed that the inflationary pressures experienced
during the first half of 2012 appear to be moderating in the third

quarter. The year-on-year headline inflation declined to 11.7 per
cent in August 2012 from 12.8 per cent in July while core inflation
decelerated to 14.7 from 15.0 per cent during the same period. Also,
food inflation declined sharply to 9.9 per cent in August 2012 from
12.1 per cent in July. The significant decline in year-on-year food
inflation was attributed to the decrease prices of both processed
foods (from 4.2 to 3.6 per cent) and farm produce (from 7.9 to 6.4
per cent). The Committee observed that the inflationary pressures
from the partial removal of petroleum subsidy in January, 2012
appear to have waned in Q3, 2012, and that given the relatively
stable exchange rate regime, the pass-through to domestic prices
was low during the period. The Committee, however, recognized the
upside risk to inflation in the near-term to include increased spending
in the fourth quarter and monetized capital flows following the US
QE3.
Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) grew by 3.50 per cent in August 2012 over
the level at end-December, 2011, which annualized to 5.25 per cent.

The annualized growth rate is significantly lower than the growth rate
of 15.43 per cent recorded in 2011. Aggregate domestic credit (net)
declined by 3.82 per cent in August 2012, annualized to a decline of
5.73 per cent from the level at end-December 2011 level. The
decline in aggregate domestic credit (net) in August 2012 was due
to a huge fall in credit to Government (net), which declined by
246.47 per cent or 369.71 per cent on annualized basis. This
development reflected the combined effects of the significant
growth in Federal Government deposits with the banking system and
contraction on claims to government. The introduction of a Treasury
Single Account (TSA) appeared to have had the desired effect of
reducing government borrowing.
Interest rates in all segments of the money markets rose initially, in
response to the increase in the Cash Reserve Requirement (CRR) by
400 basis points at the MPC meeting of July 21 and 22, 2012. The
rates, however, trended downwards toward the end of the review
period. The inter-bank call and OBB rates, which opened at 17.85
and 14.99 per cent, closed at 14.19 and 13.56 per cent, respectively,

during the review period. Developments in the interest rate structure
indicated that the retail lending rates remained high in August 2012.
The average maximum lending rate increased marginally to 23.76
per cent in August 2012 from 23.45 per cent in July. However, the
average interest bearing deposit rate declined to 6.24 per cent in
August 2012 from 6.64 per cent in July. Thus, the spread between the
average maximum lending rate and the average interest-bearing
deposit rate widened to 17.53 per cent in August 2012 from 16.81 per
cent in July. The Committee expressed concerns that lending rates
have remained high and enjoined the Bank to sustain its efforts
towards the reduction in interest rate spread, while stabilizing
interbank rates to sustain liquidity and facilitate intermediation in the
banking system. The Committee noted that this can only be
achieved by sustaining the current efforts at reducing overheads in
the banking industry and deepening capital market reforms to
diversify sources of finance for the real economy, and complement
bank loans.

The Committee observed that the recovery in the Nigerian capital
market continued during the review period, as equities market
indicators were positive. The All-Share Index (ASI) increased by 9.96
per cent between June 29, 2012 and August 31, 2012, while Market
Capitalization (MC) increased by 9.64 per cent during the same
period. Equity Market Median PE ratios at 9.86 in August 2012, fell
below the long-run median of 10.77 by 0.91 or 8.44 per cent,
suggesting bargain valuations and an imminent rebound. The
Committee observed that the performance of the NSE during the
period was consistent with the global trends, especially in the wake
of monetary expansion.
External Sector Developments
At the Wholesale Dutch Auction System (WDAS), the exchange rate
during the period, July 25 – August 31, 2012, opened at N157.40/US$
and closed at N157.36/US$, representing an appreciation of N0.04k.
The appreciation was due to the combined effects of the increase in
Cash Reserve Requirement, reduction in the Net open position and
the policy barring DMBs/Discount Houses from accessing Lending

windows (SLF and Repo) and WDAS simultaneously. At the interbank
segment, the selling rate opened at N160.05/US$ and closed at
N158.15/US$, representing an appreciation of N1.90 or 0.01 per cent.
The appreciation experienced in this segment was due to increased
supply of foreign exchange by oil companies to the interbank
market. At the BDC segment of the foreign exchange market, the
selling rate opened at N163.00/US$ and closed at N161.00/US$,
representing an appreciation of N2.00k or 0.01 per cent for the
period. The appreciation recorded in this segment was traced to the
low demand of foreign exchange by end users vis-à-vis the high
supply of foreign exchange at the interbank market and the
apparent taming of speculative activities.
The Committee noted with satisfaction that the premia between the
rates at the WDAS and the interbank; and between the wDAS and
the BDCs; narrowed towards the end of the review period, and
therefore encouraged the Bank to sustain and complement existing
measures to discourage speculative demand in the market. In

general, the Committee noted that the decisions taken at the last
meeting of the MPC had produced the desired result.
In the same vein, the Committee expressed satisfaction with the
significant accretion to external reserves during the period. Gross
external reserves as at September 5, 2012 stood at US$ 41.81 billion,
representing an increase of US$ 6.40 billion or 18.07 per cent above
the level of US$35.41 billion at end-June 2012. External reserves
increased by US$ 8.88 billion or 27.0 per cent on a year-on-year basis
compared with US$ 32.93 billion at end- August 2011. The increase in
the reserve level was driven mainly by proceeds from crude oil and
gas sales and crude oil related taxes. The foreign reserves level could
finance over seven months of imports.
The Committee’s Considerations
Given developments in the global and domestic economy and the
financial markets, the Committee noted that the weak global
growth indices called for cautious optimism by policymakers. The
resolution of the euro area debt crises remains a major concern
even with the approval of the efforts of the European Central Bank

to address the debt crises in the euro area by the German
Constitutional Court. It further noted that its decisions at the July
MPC Meeting appeared to have had some positive impact in a
number of areas, namely: a deceleration in year-on-year inflation in
August 2012, stability of short term interest rates around the Monetary
Policy Rate (MPR), buildup in external reserves and stability in the
exchange rate. However, core inflation is still high at 14.7 per cent in
August. The threat of increased inflow of hot money arising from the
actions of the US Fed to further stimulate the economy through its
QE3 activities and its capital reversal implications were noted.
The Committee noted the rise in oil prices but cautioned against a
hasty deployment of the windfall to immediate consumption as the
trend could be reversed. Monetary policy could not, therefore,
under the circumstance, react to what may be purely temporary
developments.
Despite the threats from a combination of global and domestic
factors, the Committee noted that the level of economic growth in
the third quarter of 2012 remained robust and the year-end forecast

would likely be met owing largely to the improvements in power
supply and the steady progress of reforms, actions in respect of the
alleged fraud in the petroleum subsidy regime and improved fiscal
operations. The Committee noted that these measures, generally
take time to impact the real economy.
With this development, the Committee observed that the inflation
outcome for the remaining period of the year is likely to be lower
than the initial forecast of 14.7 per cent. The Committee would
continue to monitor developments in the price level, and remain firm
in its commitment to price stability as its mandate. The Committee
also noted that the growth rate of real output, though impressive by
global trends, was on the downward trend since Q1 2010 most
especially in the agricultural sector. It was of concern to the
Committee that the declining output in the agricultural sector was
traceable to the security challenges and high intensity of rainfall
which has led to flooding in several parts of the country. It noted that
the measures taken at the last MPC meeting have succeeded in

stabilizing the foreign exchange market as well as enhancing the
build up in external reserves.
Overall, the MPC believes that the current rise in crude oil prices and
the tight monetary policy regime presented an opportunity for
building reserve buffers in the light of the uncertainties surrounding
the global economy.
The Committee, therefore, identified the key policy challenges to
include:
1. Protecting the domestic economy and building external
reserves buffer;
2. Potential large inflow of “hot money” resulting from further
monetary easing in the US and Europe and improved yield on
fixed income instruments;
3. Persisting high core inflation rates;
The Committee noted that this moderation in headline inflation has
not been accompanied by a significant decline in core inflation.
Given the unpredictability of food prices, there is a need to watch

this trend as we approach year-end before altering the present
monetary stance.
Decisions:
In view of the foregoing, the Committee by a unanimous vote
decided as follows:
1. Retain the Monetary Policy Rate (MPR) at 12 per cent with +/-
200 basis points corridor;
2. Retain the Cash Reserve Requirement (CRR) at 12.0 per cent.
3. Retain the Net Open Position at 1.0 per cent.
Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
18th September, 2012