CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 120 OF THE MONETARY POLICY
COMMITTEE MEETING OF MONDAY 24th AND TUESDAY 25th SEPTEMBER, 2018
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 profittaking 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:
I.
Retain the MPR at 14 per cent;
II.
Retain the asymmetric corridor of +200/-500 basis points around the
MPR;
III.
Retain the CRR at 22.5 per cent; and
IV.
Retain the Liquidity Ratio at 30 per cent.


Thank you.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
25th September 2018