PRESS RELEASE

CENTRAL BANK OF NIGERIA COMMUNIQUE NO. 50 OF THE MONETARY
POLICY COMMITTEE, JUNE 5, 2007

The Monetary Policy Committee of the CBN met on 5th June 2007 and decided
to reduce the MPR by 200 basis points, i.e., from 10.0 per cent to 8.0 per cent

1) The Monetary Policy Committee (MPC) met on 5th June, 2007 and reviewed
the major macroeconomic developments and the implementation of fiscal,
monetary and exchange rate policies in the first five months of 2007, as well
as the challenges for the rest of the year. The meeting, the second in 2007,
lasted three hours. The MPC noted with satisfaction the macroeconomic
performances in the first five (5) months, as inflation and naira/dollar
exchange rates stabilized further. It however, noted the potential threat to
inflation. The Committee, therefore, expressed its commitment to sustaining
macroeconomic stability.

Key Macroeconomic Developments
2) Inflation: The MPC noted that the inflation rate stayed within single digit in
the first four months of 2007. In particular, the year-on-year (headline)
inflation dropped steadily from 8.5 per cent at end-December 2006 to 4.2 per
cent in April 2007. The Committee also observed that although the current

estimates show that inflation would remain single-digit at the end of the
second-quarter, inflation pressures still persist.
3) Exchange Rate: The MPC noted with satisfaction the continued stability of
the naira exchange rate in the first five months of 2007 as the naira remained
stable at both the wDAS and the BDCs during the period. The naira
exchange rate in the wDAS moved between N126.60/US$1 and
N128.29/US$1 (rate +1%) in January through May, 2007. In addition, the
premium between the wDAS and BDC rates narrowed from 1.39 per cent in
January to 1.2 per cent in May 2007. The Committee noted the positive
impact of the stability in exchange rate on the economy generally, particularly
in locking-in inflationary expectations. Thus, the MPC reaffirmed its
commitment to sustain the liberalization of the foreign exchange market.
4) External Reserves: From $41.96 billion at end December 2006, gross
official reserves rose to $43.48 billion as at 28th May, 2007, which could
finance 25 months of imports. The Committee, however, noted the risk to
growth of reserves arising from the decline in the volume of crude oil
production due to disturbances in the Niger Delta, but welcomed the initiatives
of the government to resolve the crisis.
5) Growth in Monetary Aggregates: At the end of the first quarter, 2007,
broad money grew by 8.80 per cent and moderated to 7.70 per cent at end-

April 2007, which when annualized showed a growth of 23.0 per cent
compared with the target of 19.0 per cent for entire 2007. The rise in M2 was
attributable to the combined effects of the increases in foreign asset (net) of
the banking system and credit to the private sector.
6) Credit: Growth in aggregate domestic credit (net) declined by about 63.7 per
cent at end-March, and by 38.7 per cent in April, 2007 relative to its level at
end-December 2006. The fall in aggregate credit was attributed mainly to the
decline in credit (net) to government during the period. Meanwhile, credit to
the private sector grew by about 24.0 per cent in first four months ending April
2007, reflecting a growth of 72.0 per cent on annualized basis. The target for
the year is 30.0 per cent. The Committee noted, however, that a significant
proportion of the credit went into import financing, which have low inflation
risk for the domestic economy. The spending items included payments for
Telecommunications and Information Technology imports and the payment
for oil blocs in foreign currencies.
7) Reserve Money: At end-March, the reserve money (N841.0 billion) was on
target under the PSI programme. In April 2007, however, reserve money
rose to N896.0 billion, while the forecast to end-June 2007 is about N926.50
billion, which is higher than the PSI target by N66.5 billion. The surge in
reserve money is attributable to the expansion in demand for currency and

growth in banks’ balances with the CBN. The MPC, therefore, stressed the
need to intensify liquidity mop up operations to reduce the excess liquidity. It
also agreed to apply some price and non-price disincentives to encourage
banks to be more professional in their liquidity management.
8) Interest Rates Developments: The introduction of the CBN Standing
Facility since December 2006 has continued to moderate the volatility in interbank rates in the first five months of 2007. In particular, the average interbank call rate moderated from 8.98 per cent in December 2006 to 7.54 per
cent in April and to 7.6 per cent in May 2007. The decline in rates was due to
the continued surfeit of funds in the market. With the year-on-year inflation
rate at 4.20 per cent in April 2007, the inter-bank rates and other rates in the
banking system have become strongly positive

OUTLOOK FOR REST OF 2007 AND MPC DECISIONS
The MPC noted that though inflation has moderated significantly, the
downside risk remained. The Committee also noted the challenges in
achieving the exit target reserve money by end-June, 2007; the rising
autonomous private inflows and the risk of over-appreciation of the
naira/dollar exchange rate.

The Committee, however, noted that the upside risk was strong. These
included the continued stability of the exchange rate; the strong external
sector reserves as well as the recent maiden broadcast of Mr. President to
the Nation on sustaining the economic reforms. On the whole the Committee
believes that the medium term outlook is one of robust economic
performance.
Against this background the Committee decided to:

a) Introduce tenured repo at MPR
b) Reduce the MPR by 200 basis points, i.e. from 10.0 per cent to 8.0 per cent
c) Reduce the width of the interest rate corridor from +/- 300 to +/- 250 basis
points.
The combined implication of (b) and (c) is that the deposit facility
now stands at 5.5 per cent while the lending facility would be 10.5
per cent, both down from 7 and 13 per cent, respectively.

d) Both facilities are expected to be used as a last resort. Consequently the
frequent usage of these facilities will attract penalty.
e) Increase the issuance of primary market instruments to mop up about N100
billion;

f) That inter-bank placements shall henceforth form part of the deposits for
calculating banks’ liquidity ratio and
g) Continued use of open market operations (OMO) in liquidity management

Thank you for your kind attention.

James K A Olekah
Director, Monetary Policy
Central Bank of Nigeria,
Abuja.

June 5th, 2007