Central Bank of Nigeria Communique No 108 of
the Monetary Policy Committee Meeting of
Monday and Tuesday 25th and 26th July 2016
The Monetary Policy Committee met on 25th and 26th July
2016 against the backdrop of fragile global and domestic
economic and financial conditions. The Committee
evaluated the global and domestic macroeconomic and
financial developments in the first six months of 2016 and
the outlook for the rest of the year. In attendance were 8
members.

International Economic Developments
The Committee noted the continued sluggish growth in
global output, being underpinned by weak demand and
slowing productivity. In addition to existing risks, rising
debt levels in the Emerging Market Economies (EMEs),
volatile financial markets and the vote of the United
Kingdom to exit the European Union “BREXIT” have
lessened the prospects for a more prosperous global
economy in 2016. Consequently,
the International
Monetary Fund (IMF), in July 2016, further downgraded its
baseline forecast for global growth to 3.1 per cent from 3.2
in April. The Organisation of Economic Cooperation and
Development (OECD) forecast for global output in 2016 is
even less optimistic at 3.0 per cent. Slower global growth
prospects is traced to weak trade, sluggish investment,

protracted weak aggregate demand and low commodity
prices; which have translated to output declines in the
Emerging Market and Developing Economies (EMDEs).
The Brexit vote has created widespread uncertainty and
elevated volatility in the global financial markets.

The United States (US) economy grew by 0.8 per cent in
Q1 of 2016, though, much lower than the 1.4 per cent
growth recorded in the last quarter of 2015. The tapered
growth was attributed to the goods sector which continues
to struggle under the weight of declining factory activity;
the hitherto resilient service sector is now losing steam
while trade remains under pressure from a strong dollar
and weak domestic demand.

The Japan economy grew at an annualized rate of 1.7 per
cent in Q1 of 2016, a reversal of the negative growth
recorded in Q4 of 2015. The Bank of Japan (BoJ) at its
15th-16th July meeting of the Monetary Policy Committee,
maintained its monthly asset purchase at ¥6.7 trillion
(US$63.93 billion), leaving the policy rate also unchanged
at negative 0.1 per cent.

The Euro Area grew by 0.6 per cent in first quarter, 2016,
up from 0.3 per cent, recorded in fourth quarter of 2015.
Downside risks to the growth outlook have, however, risen
following the Brexit vote. The Governing Council of the
European Central Bank (ECB), at its meeting of July 21st,
2016, retained its key interest rates on the main
refinancing operations, the marginal lending facility and

the deposit facility at 0.00, 0.25 and -0.40 per cent,
respectively, with the expectation that they would remain
at present or lower levels for an extended period of time.
The ECB also sustained its monthly asset purchases of
€80 billion (US$87.91) until March 2017, with possibility of
extension.

In anticipation of and to mitigate the impact of the Brexit
vote, the Bank of England (BoE) voted to continue its ₤375
billion (US$495 billion) monthly assets purchase program,
financed through the issuance of reserves and possible
increase in the quantum should the need arise. The Bank
also retained its policy rate at 0.5 per cent, with a
commitment to stimulate inflationary growth towards its 2.0

per cent long run path. The Bank also hinted at a possible
further easing of monetary policy in August, 2016.

Major EMDEs continued to face declining capital inflows,
rising financing costs and geo-political tensions, all of
which pose constrain to growth. Depressed commodity
prices continued to tilt the balance of risk towards the
downside, thus, dampening prospects for near term
economic
and
financial
recovery
in
the
EMDEs.
Consequently, the IMF (WEO July 2016 Update)
downgraded the 2016 growth forecast for this group of
countries to 4.1 from 4.3 per cent in the April projection.

In July, oil and other commodity prices rallied against the
backdrop of better-than-expected economic data on China

in the second quarter, sustained attacks on oil production
facilities in Nigeria, and continued unrest in Libya.
Nonetheless, global inflation remained subdued despite
widespread easing of monetary policy. In the advanced
economies, recent developments such as BREXIT has
increased the uncertainty surrounding the future of the
Euro
zone
thus
further
weakening
demand
and
suppressing inflation. Consequently, while the stance of
monetary policy in most advanced economies is expected
to remain accomodative through fiscal 2016 in the
EMDEs, it is expected to remain mixed, reflecting diversity
and multiplicity of shocks confronting them.

Domestic Economic and Financial Developments
Output
The Nigerian economy is still saddled with the effects of
the shocks of the first quarter of 2016; which led to a
contraction in output arising from energy shortages, high
electricity tariffs, price hikes, scarcity of foreign exchange
and depressed consumer demand, among others.
Whereas the influence and persistence of some of the
factors waned in the second quarter, it is unlikely that the
economy rebounded strongly in the quarter as setbacks in
the energy sector continued owing mainly to vandalism of
oil installations. In addition, the implementation of the 2016
budget in the second quarter remained slower than
expected in the second quarter. The Committee noted that
most of the conditions undermining domestic output

growth were outside the direct purview of monetary policy.
It nonetheless, hopes that the deregulation in the
downstream petroleum sector and the liberalization of the
foreign exchange market would help bring about the much
needed relief to the economy.
Data from the National Bureau of Statistics (NBS) indicate
that domestic output in the first quarter of 2016 contracted
by 0.36 per cent, the first negative growth in many years.
This represented a decline of 2.47 percentage points in
output from the 2.11 per cent reported in the fourth quarter
of 2015, and 4.32 percentage point lower than the 3.96
per cent recorded in the corresponding period of 2015.
Aggregate output contracted in virtually all sectors of the
economy, with the non-oil sector recording a decline of
about 0.18 per cent, compared with the 3.14 per cent

expansion in the preceding quarter. Agriculture and Trade
were the only sectors with positive growth at 0.68 per cent
and 0.40 per cent, respectively, Industry, Construction and
Services contracted by 0.93, 0.26 and 0.08 percentage
point, respectively.

Prices
The Committee noted a further rise in year-on-year
headline inflation to 16.48 per cent in June 2016, from
15.58 per cent in May; 13.72 per cent in April, 12.77 per
cent in March and 11.38 per cent in February 2016. The
increase in headline inflation in June reflected increases in
both food and core components of inflation. Core inflation
rose sharply for the fourth time in a row to 16.22 per cent
in June, from 15.05 per cent in May; 13.35 per cent in

April; 12.17 per cent in March; 11.00 per cent in February
and 8.80 per cent in January having stayed at 8.70 per
cent for three consecutive months through December,
2015. Food inflation also rose to 15.30 per cent in June,
from 14.86 per cent in May; 13.19 per cent in April; 12.74
per cent in March; 11.35 per cent in February, 10.64 per
cent in January and 10.59 per cent in December, 2015.
The rising inflationary pressure was largely a reflection of
structural factors, including high cost of electricity, high
transport cost, high cost of inputs, low industrial activities
as well as higher prices of both domestic and imported
food products.
The MPC expressed strong support for the urgent
diversification of the economy away from oil to
manufacturing, agriculture and services; and called on all

stakeholders to increase investment in growth stimulating
and high employment elasticity sectors of the economy in
order to lift the economy out of its current phase.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 8.26 per cent in June,
2016, a 4.80 percentage points increase from 3.46 per
cent in May compared with the 0.54 per cent contraction in
June 2015. When annualized, M2 grew by 16.52 per cent
in June 2016 against the provisional growth benchmark of
10.98 per cent for 2016. Net domestic credit (NDC) grew
by 12.52 per cent in the same period and annualized at
25.04 per cent. At this rate, the growth rate of NDC
exceeded the provisional benchmark of 17.94 per cent for
2016. There was no change in the level of banking sector
net credit to government in June, contrasting the 31.45 per

cent growth in May. Credit to the private sector grew by
14.45 per cent in June 2016, which annualizes to a growth
of 28.90 per cent, outperforming the benchmark growth of
13.38 per cent for the year. The MPC expressed cautious
satisfaction over the improved performance of credit to the
private sector and urged the Bank to ensure that the
tempo is sustained inorder to stimulate recovery of output
growth.
The MPC noted that the level of money market interest
rates largely reflected the liquidity situation in the banking
system during the review period. Average inter-bank call
rate, which stood at 20.0 per cent on 17th June 2016,
closed at 50.0 per cent on July 15, 2016. The increase
was attributed in part; to the newly introduced foreign
exchange framework and the mop up of naira liquidity due

to increased sale of foreign exchange by the CBN during
the period. Generally, the period under review witnessed a
decline in volume of activity in the inter-bank market owing
to injections by FAAC and maturity of some CBN
securities.
The MPC also noted the decline in the indices of the
equities segment of the capital market. The All-Share
Index (ASI) declined by 6.55 per cent from 29,597.79 on
June 30, 2016, to 27,659.44 on July 22, 2016. Similarly,
Market Capitalization (MC) declined by 6.26 per cent from
N10.17 trillion to N9.50 trillion during the same period.
Relative to end-December 2015, the indices fell by 3.43
per cent and 3.55 per cent, respectively. Globally,
however, the equities markets remained generally bearish,
in the aftermath of the Brexit vote.

External Sector Developments
The MPC noted the actions taken by the Bank as part of
the implementation of the flexible foreign exchange regime
decided at its meeting in May which was designed to
improve liquidity and stabilize the foreign exchange
market. The Bank introduced a flexible exchange rate
regime in the inter-bank market; introduced a Naira-settled
OTC-FMDQ-OTC trading platform, adopted two-way quote
trading platform at the inter-bank foreign exchange market
and appointed foreign exchange primary dealers.
However, the average naira exchange rate weakened at
the inter-bank segment of the foreign exchange market
during the review period following the liberalization of the
market. The exchange rate at the interbank market
opened at N197.00/US$ and closed at N292.90/US$, with

a daily average of N244.95/US$ between May 25 and July
19, 2016. The initial weakness was attributable to the
normal market reaction to a new regulatory reform. The
MPC reaffirmed its commitment to its statutory mandate of
achieving a stable naira exchange rate.

The MPC’s Considerations
The
MPC
recognized
the
weak
macroeconomic
environment, as reflected particularly in increasing
inflationary pressure and contraction in real output growth.
In view of this, the MPC underscored the imperative of
coordinated action, anchored by fiscal policy, to initiate
recovery at the earliest time. Members called on the
Federal Government to fast-track the implementation of
the 2016 budget in order to stimulate economic activity to

bridge the output gap and create employment. In the same
vein, the MPC expressed concern over the non-payment
of salaries in some states and urged express action in that
direction to help stimulate aggregate demand. On its part,
and as a complementary measure, the MPC restated its
commitment to measures and deployment of relevant
instruments within its purview to complement fiscal policy
with a view to restarting growth. The Committee also
enjoined deposit money banks (DMBs) to partner with
Government and the Bank in this direction, by redirecting
credit from low employment generating sectors to those
capable of supporting growth, reducing unemployment
and improving citizen standards of living.

Members agreed that the economy was passing through a
difficult phase, dealing with critical supply gaps and
underscored the imperative of carefully navigating the
policy space in order to engender growth and ensure price
stability. The MPC therefore, summarized the two policy
options it was confronted with as restarting growth or
fighting inflation. The MPC was particularly concerned that
headline inflation spiked significantly in June 2016,
approaching twice the size of the upper limit of the policy
reference band.
The Committee noted that inflation had risen significantly,
eroding real purchasing power of fixed income earners
and dragging growth. The MPC was further concerned
that while the situation called for obvious tightening of the
monetary policy stance, the recession confronting the

economy and the prospects of negative growth to yearend needed to be factored into the policy parameters.
The arguments in favour of growth were anchored on the
premise that the current inflationary episode was largely
structural. In particular, members noted the prominent role
of cost factors arising from reform of the energy sector,
leading to higher domestic fuel prices and electricity tariffs
and prolonged foreign exchange shortages arising from
falling oil prices leading to higher inputs costs, domestic
fuel shortages, increased transportation costs, security
challenges, reform of the foreign exchange market
reflected in high exchange rate pass-through to domestic
prices of imports. Consequently, the current episode of
inflation, being largely non-monetary but largely structural,
tightening at this point would only serve to worsen

prospects for growth recovery as the Bank had in June
2016, withdrawn substantial domestic liquidity through the
foreign exchange market upon introduction of the flexible
foreign exchange market regime. Members however,
noted the negative effect of inflation on consumption and
investment decisions and its defining impact on the
efficiency of resource allocation and investment.
The MPC further noted the prolonged non-payment of
salaries, a development which has affected aggregate
demand and worsened growth prospects. It also noted
that at the May MPC meeting, members weighed the risks
of the balance of probabilities against growth and voted to
hold, allowing fiscal policy some space to stimulate output
with injections, but this has been long in coming.

The MPC in putting forward for tightening considered the
high inflationary trend which has culminated into negative
real interest rates in the economy; noting that this was
discouraging to savings. Members also noted that the
negative real interest rates did not support the recent
flexible foreign exchange market as foreign investors
attitude had remained lukewarm, showing unwillingness in
bringing in new capital under the circumstance. Members
further noted that there existed a substantial amount of
international capital in negative yielding investments
globally and Nigeria stood a chance of attracting such
investments
with
sound
macroeconomic
policies.
Consequently, members were of the view that an upward
adjustment in interest rates would strongly signal not only
the Bank’s commitment to price stability but also its desire

to gradually achieve positive real interest rates. Such a
decision, it was argued, gives impetus for improving the
liquidity of the foreign exchange market and the urgent
need to deepen the market to ensure self-sustainability.
Members were of the opinion that this would boost
manufacturing and industrial output, thereby stimulating
growth which is desired at this time.
The Committee’s Decisions
The MPC, recognizing that the Bank lacked the
instruments required to directly jumpstart growth, and
being mindful not to calibrate its instruments in such a
manner as to undermine its primary mandate and financial
system stability, in assessment of the relevant issues, was
of the view that the balance of risks remains tilted against
price stability. Consequently, five (5) members voted to

raise the Monetary Policy Rate while three (3) voted to
hold.
In summary, the MPC voted to:
(i) Increase the MPR by 200 basis points from
12.00 to 14 per cent;
(ii) Retain the CRR at 22.50 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
26th July 2016