Central Bank of Nigeria Communiqué No. 86 of the Monetary Policy
Committee Meeting of Monday and Tuesday November 19 and 20,

The Monetary Policy Committee (MPC) met with nine out of the
twelve members in attendance. The Committee reviewed the
domestic
and
global
economic
conditions
and
financial
environment as well as the challenges that faced the Nigerian
economy during the first ten months of fiscal 2012, with a view to
reassessing monetary policy options in the near-to-medium term.
The International Economic Situation
The Committee noted the continued deceleration in global output,
which resulted from a combination of austerity-driven euro-zone
developments, weak recovery in some Asian economies, and
slowdown in major emerging market economies. In addition, high
and rising unemployment, fragile financial conditions, weak housing
markets, and deterioration in both public and private sector
balance sheets in some major industrial countries posed major risks to
global economic recovery. Thus, global output growth in 2012, which
was earlier projected at 3.5 per cent in July 2012 by the IMF, was
revised downward to 3.3 per cent in the October 2012 World
Economic Outlook; that of 2013 was also revised downward from 3.9
to 3.6 per cent. According to the October 2012 projection, there is a
high probability of global growth falling below 2.0 per cent in 2012
and this would mirror the recession in the advanced economies and
the slowing output growth in key emerging markets and developing
economies.

Growth in the advanced economies is estimated at 1.3 per cent in
2012 and 1.6 per cent in 2013, reflecting a downward revision of 0.1
and 0.3 percentage point, respectively. The US economy continued
on the path of modest recovery as real output expanded by 2.0 per
cent in the third quarter of 2012 compared with 1.3 per cent in the
second quarter, reflecting the positive contributions from personal
consumption expenditure, government spending, private inventory
and residential housing investment in the face of current low
mortgage rates. However, the recent hurricane Sandy across the
east coast of the United States, constitutes an immediate risk to the
sustainability of the recent growth rally and its impact is expected to
truncate US recovery in the last quarter of 2012. Another major risk to
the medium term growth trajectory is the US “fiscal cliff”. The IMF has
suggested a gradual resolution of the fiscal impasse in order to avoid
the possibility of a sharp contraction.

The Euro zone is officially in recession in addition to the persisting
uncertainty over agreements on a fiscal union, the start of European
Central Bank’s (ECB) oversight of European banks and the fragility of
the Greek, Spanish and other peripheral economies. Real GDP in the
zone is projected to contract by 0.4 per cent in 2012 with
unemployment rising to 11.50 per cent. The core economies in the
zone are expected to experience low but positive growth during
2012-13 while most economies in the periphery are expected to
suffer sharp output contraction in 2012 because of tight fiscal
policies and weak financial conditions.

The German economy recorded slight recovery with unemployment
falling to 6.5 per cent while the United Kingdom snapped out of a
recession, recording a growth rate of 1.0 per cent after three
successive quarters of contraction. Rising uncertainty about the
viability of the Euro zone and the possibility that the euro area crisis
will escalate remains a major downside risk to growth and financial
sector stability. Overall, continued austerity measures in the euro
area are having negative spill-over effect on the German economy
which is now wobbling on the verge of a recession due to
widespread drop in aggregate demand.

In emerging Asia, growth was estimated to have significantly
weakened to less than 7 per cent in the first half of 2012. Latest data
indicate that growth in China slowed for the seventh consecutive
quarter to 7.40 per cent in Q3, 2012, lower than the Q2, 2012 figure of
7.60 per cent. The Peoples Bank of China (PBC) had already
embarked on sequential monetary easing operations in order to
loosen liquidity conditions and stimulate growth. This will, however,
increase the risk of inflating real estate prices and a possible bubble
with potential adverse impact on the Chinese financial system. In
India, output is expected to expand by 5.80 per cent in 2012 as
against 6.50 per cent in 2011 with the slowdown resulting from
waning business confidence, sluggish structural reforms, policy rate
hikes designed to rein in inflation, and flagging external demand. In
other parts of Asia, growth has dipped, hampered by the weak
performance of the Chinese economy. Most countries continue to
be affected by weak export growth while the Monetary Authorities
have responded with expansionary monetary policy.

Output growth for 2012, at 5.1 per cent, up from 3.3 per cent in
2011for the Middle East and North Africa (MENA) region, could be
considered robust in the face of global realities, but there is a sharp
difference in growth performance between the oil and non-oil
exporting countries in the region. For the non-oil exporting
economies, growth is projected to register just above 2.0 per cent
and 6.6 per cent for the oil exporting economies. Economic activities
in the non-oil exporting countries have remained suppressed by the
growth deceleration in the major trading partner-economies,
internal conflicts and pervading political/economic uncertainties.
The robust growth projection for the oil exporting countries, on the
other hand, is anchored on increased government expenditure
supported by historically high oil prices. Despite these developments,
the Committee is of the view that growth for the MENA Region in the
medium term is faced with the risk of weak external demand,
instability in the region and an increasingly constrained environment
for private sector activity. However, Africa’s robust growth is not likely
to affect the downward trend in global output because of its small
share (2.7 %) of global output.

Overall, the Committee believes that the fiscal gridlock in the US, the
lingering euro zone financial and economic crisis, as well as the
softening output growth in the key emerging Asian economies,
could have serious implications for the domestic economy in the
near-to-medium term. Specifically, any negative shock to the current
high prices of crude oil would have adverse implications for fiscal
revenue flows and the external current account position, even
though current forecasts and developments in the Middle East do
not suggest the possibility of a shock in the near term.

Domestic Economic and Financial Developments
Output
The National Bureau of Statistics has revised the real Gross Domestic
Product (GDP) growth for fiscal 2012 downwards to 6.61 per cent
from the earlier projection of 6.85 per cent, indicating that the
economy
is
encountering
growth
challenges
not
previously
anticipated. The estimates revealed a real GDP growth rate of 6.48
per cent in the third quarter of 2012, up from 6.39 per cent in the
second quarter but lower than the 7.37 per cent recorded in the
corresponding period of 2011. The non-oil sector remained t

The Committee noted with concern the continuing decline in the
contribution of the oil sector to growth, in an area of strong oil price
performance, which became apparent in the last half of 2011 and
also the decline in the contribution of agriculture to growth since Q3,
2011, in spite of the investment in the Agricultural transformation
initiatives of the Federal Government.

The relatively robust growth projections for 2012 despite the
slowdown in the global economy reflected the continuing favorable
conditions for increased agricultural production, the impact of the
banking sector reforms and the initiatives by government to
stimulate the real economy. In this regard, the Committee
welcomed the recent improvements in electricity generation which
has impacted positively on manufacturing activities and overall
capacity
utilization.
The
Committee
enjoined
the
Federal
Government to sustain the efforts.

The Committee, however, observed that the recent flooding in
several parts of the country, current security challenges and
corruption scandals posed serious downside risks to growth in the
near-to-medium term. Indeed, it noted that the full impact of the
widespread flooding was yet to manifest while the cost to the
economy was yet to be estimated. The committee noted the
combined effects of the high tariffs, floods and drought on global
wheat supplies which have led to higher prices of wheat in Nigeria.

Prices
The Committee noted that inflationary pressure, which moderated in
the third quarter of 2012, re-emerged in October 2012. The year-onyear headline inflation inched up to 11.70 per cent in October 2012
from 11.3 per cent in September while food inflation increased to
11.1 per cent from 10.2 per cent in September. Core inflation
continued its sequential four-month moderation to 12.40 per cent
from 13.10 per cent in September while the risk of food inflation
remained hawkish, thus creating mixed price signals. The major
drivers of inflation during the period include food and housing,
water, electricity, gas and other fuels. The pick-up in food inflation
contradicted recent trends and may not be unconnected with
effects of the floods on farmlands, the impact of which poses an
upside risk to inflation in the near-term, coupled with continued
imported food inflation. Although core inflation continued its
moderation, the Committee considered the current level to still be
elevated, driven largely by: processed foods (3.7 per cent); housing,
water, electricity, gas and other fuels (4.2 per cent); clothing and
footwear (1.4 per cent); transport (1.10 per cent); furnishing,
household equipment and housing maintenance (0.7 per cent); and
education (0.6 per cent). However, the major drivers of core
inflation remained outside the scope of monetary policy alone
which was helpless in addressing the structural components of
inflation. In the meantime, fuel prices have risen generally above
the official pump price even without the total removal of oil subsidy.

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 8.23 per cent in October 2012
over the level at end-December, 2011, which annualizes to 9.87 per
cent. Aggregate domestic credit (net) declined by 3.48 per cent in
October 2012. The decline in credit to government between June
and October implies that the Federal Government is increasingly
becoming a net creditor to the banking system which perhaps
reflects the impact of better fiscal management including the
introduction of Treasury Single Account.
Interest rates in all segments of the money market moderated
between September 19 and October 30, 2012, reflecting increased
liquidity in the banking system induced by the release of statutory
revenue to sub-national governments, the repayments of matured
CBN bills and absence of repo operations during the review period..
The interbank call and OBB rates, which opened at 16.77 and 16.40
per cent on September 19, 2012, closed at 12.03 and 11.70 per cent,
respectively, on October 30, 2012. The average interbank call and
OBB rates for the period were 11.68 and 11.38 per cent, respectively.
The foregoing notwithstanding, the Committee was concerned that
the moderation in money market rates was only beneficial to prime
customers, who enjoyed a fair degree of reduction in rates on their
loan facilities. The average prime lending rate declined from 16.96
per cent in July to 16.48 per cent in October. The average maximum
lending rate, however, increased from 23.45 to 24.65 per cent during
the period while the weighted average savings and term deposit
rate stabilized at 5.30 per cent during the period. The Committee,
therefore enjoined the Bank to fast track the financial inclusion
strategy to ensure the effectiveness of the transmission mechanism
of monetary policy with a view to improving the financial
intermediation process, and reducing the high spread between
deposit and lending rates in the banking industry.
The Committee observed that the rally in the Nigerian capital market
continued as equities market indicators trended upward in the
review period. The All-Share Index (ASI) increased by 22.37 per cent
from 21,599.57 to 26,430.92 between June, 29 and October 31, 2012.
Market Capitalization (MC) also increased, by 22.15 per cent, from
N6.90 trillion to N8.42 trillion during the same period. The positive
performance of the ASI and MC were due to strong investor
confidence
following
improved
second
quarter
financial
performance of blue-chip companies, as well as excellent results
from a reinvigorated banking industry.
External Sector Developments
At the Wholesale Dutch Auction System (wDAS), the exchange rate
during the review period opened at N157.36/US$ on August 30,
2012 and closed at N157.30/US$ on October 31, 2012, representing
an appreciation of N0.06k or 0.04 per cent. The average wDAS
exchange rate during the period was N157.33/US$. At the BDC
segment of the foreign exchange market, the selling rate opened at
N161.00/US$ on August 30, 2012 and closed at N159.00/US$ on
October 31, 2012, representing an appreciation of N2.00k or 1.24 per
cent for the period. At the interbank segment, the selling rate
opened at N158.10/US$ on August 30, 2012 and closed at
N157.06/US$ on October 31, 2012, representing an appreciation of
N1.04k or 0.66 per cent. The appreciation recorded in all segments
of the market could be traced to the combined effects of tight
monetary conditions, improved supply of foreign exchange to the
market by oil companies; increased inflows from portfolio investors
and the policy that barred the DMBs from accessing the CBN
Lending window (SLF and Repo) and wDAS simultaneously.
The Committee noted with satisfaction 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, from
N0.74/US$ and N3.64/US$ to N0.03/US$ and N1.68/US$, respectively,
suggesting the need to sustain and further complement existing
measures to discourage speculative activities in the foreign
exchange market. In general, the Committee noted that the
decisions taken at the previous MPC meetings were yielding the
desired results.
The Committee expressed satisfaction with the significant accretion
to external reserves which stood at US$ 45.68 billion as at November
15, 2012, representing an increase of US$ 10.27 billion or about 29.00
per cent from the level of US$35.41 billion at end-June 2012. External
reserves had increased by US$ 13.04 billion or 39.95 per cent over the
December 2011 level of US$ 32.64 billion. The increase in the foreign
reserves level was driven mainly by proceeds from crude oil and gas
sales and crude oil-related taxes, as well as reduced funding of the
wDAS due to increase inflow of foreign direct investment. The foreign
reserves level could finance over 10 months of imports. The
Committee urged the Central Bank to continue to monitor the inflow
and destination of FDIs and remittances conscious of the risks to
financial stability of a rapid outflow of hot money.

The Committee’s Considerations
The Committee noted that developments in the global economy
characterized by general uncertainty on the back of the
deceleration in global growth sustained by the fragile financial
conditions, weakening labor and housing markets and deteriorating
public and private balance sheets across advanced and emerging
economies, have implications for the domestic economy and,
therefore,
demand
careful
consideration
in
arriving
at
an
appropriate
decision
of
monetary
policy.
The
uncertainty
surrounding the resolution of the fiscal cliff in the US and the
downside risk created by Hurricane Sandy on US output in Q4 are
also important factors to consider. The Committee noted that if the
fiscal cliff was not resolved quickly, it would negatively impact the
already ballooning deficits and subsequently tip the economy into a
recession with downside risks to oil price developments. The
Committee noted that the lack of clear direction for the resolution of
the Euro area crises will continue to signal a likely recession in the
area in the near term. Developments in the domestic economy in
the past three months highlight some new pressure points to
macroeconomic stability. The Committee was of the view that
despite the high interest rates, additional shocks to the economy
emanating from the devastating floods, imported inflation and the
upward adjustment in electricity tariffs continue to stoke inflationary
pressure. The Committee noted the conflicting price signals coming
from the latest inflation numbers from the National Bureau of
Statistics, with headline and food inflation trending upwards, while
core inflation rate continued to moderate for the fourth consecutive
month. This according to the Committee has created uncertainty as
to the appropriate policy stance at this time. However, since the
factors underpinning the inflationary pressures were mainly structural,
a monetary response may not be appropriate at this time.
Furthermore, the Committee observed that while there were
compelling arguments for monetary easing at this time based on the
continuous moderation of core inflation, slowdown in GDP growth
and evidence of fiscal prudence, the short-term gains may not be
sufficiently adequate to overturn the long term implications of
sending a wrong signal that the tightening cycle was permanently
over.
With regard to the balance sheet of the Federal Government, the
Committee was of the view that it has become imperative to shift
away from looking at the size of the deficit and borrowing alone, to
emphasizing the quality of expenditure and decisions on the
allocation of resources. The Committee commended the fiscal
authorities for keeping the fiscal deficit firmly in line with the 2012
budget and improving the revenue profile of the Federal
Government by plugging several of the fiscal leakages. It called on
the Government to significantly increase capital spending and
increase its focus on improving on governance and transparency in
the public service. On the oil price benchmark used in the 2013
budget, the MPC reaffirmed its support for the maintaining the
US$75/barrel proposed by the fiscal authorities and noted that this
has become even more critical in light of evidence that output
projections may have been overly optimistic. In this regard, the
Committee called on the Government and the National Assembly
going forward, to borrow from the Chilean experience with regard to
the setting of the parameters for the preparation of the National
Budget to avoid the perennial rancor between the Executive and
the Legislature on benchmark oil price. Specifically, the Committee
called for the setting up of an independent legal structure that will
set the benchmark output and price underpinned by the long term
trajectory of output and price, by independent experts who are
shielded from political interference and interests.
In view of these developments, the Committee was faced with three
choices:
(i)
An increase in rates in response to the up-tick in headline
and food inflation;
(ii)
A reduction in rates in view of declining core inflation and
GDP growth;
(iii)
Retaining current monetary policy stance in view of
conflicting price signals and global uncertainties;
The Committee’s Decisions
The Committee considered and rejected option 1 as being
potentially pro-cyclical considering the structural nature of recent
inflationary pressures. While acknowledging the merit of the
arguments in favour of option 2, it was also rejected as likely to send
wrong signals of a premature termination of an appropriately tight
monetary stance.
The Committee therefore, decided by a unanimous vote to maintain
the current policy stance i.e. to retain the MPR at 12 per cent with a
corridor of +/- 200 basis points around the midpoint; and retain the
CRR at 12.0 per cent and the Liquidity Ratio at 30 per cent.
Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
20th November, 2012


PERSONAL STATEMENTS BY MPC MEMBERS:

1.0 ALADE, SARAH
Headline inflation increased marginally to 11.7 percent in October
from 11.3 percent recorded in September. This increase is driven
mainly by food inflation which edged up to 11.3 percent in October
from 10.2 percent recorded in the previous month. In the
international
scene
there
are
great
uncertainties:
while
unemployment rate is trending
downwards at 7.9 percent
compared to 9 percent a year ago in the United States, concrete
strategy to deal with the fiscal cliff have not been agreed on. In the
Euro zone, the continued progress by the Euro zone ministers to
tackle the Euro area debt problems has not yielded major
breakthrough. On the domestic front, third quarter GDP growth
remain robust at 6.48 percent, higher than 6.39 percent recorded in
the second quarter. The major risks to monetary policy in the near to
medium term would include inflationary implication of the recent
unprecedented
flood
which
could
exacerbate
the
current
precarious food inflation through food deficit. Additionally the risk of
external shock is fairly high as a result of continuous moderation in
global growth with severe implication for the buildup of external
reserves. Although inflation increased marginally, this trend is a
seasonal phenomenon and hiking policy rate at this time may be
counterproductive.

Headline inflation increased marginally to 11.7 percent in October
from 11.3 percent recorded in the previous month. Headline inflation
increase marginally driven mainly by increase in food inflation. High
imported food prices couple with flood in some parts of the country
is driving up food prices. While core inflation decreased from 13.1
percent in September to 12.4 percent, food inflation however
increased from 10.2 percent to 11.1 percent. Staff projections
suggest a temporary inflationary pressure in the coming months due
to end of year spending.

Gross Domestic Product (GDP) is revised downward and is projected
to grow by 6.61 percent in 2012 from the 6.78 previously projected.
Third quarter GDP growth edged up to 6.48 percent from 6.39
recorded in the second quarter of the year. The non-oil sector grew
by7.55 percent during the third quarter, decreasing marginally from
7.63 percent record in the second quarter. The contribution of
agriculture decreased from 4.21 percent in the second quarter to
3.89 percent in the third quarter, further justifying the increased food
inflationary pressure. The contribution of wholesale and retail trade
increased from 8.65 percent to 9.62 percent. The outlook for growth
in 2012 through the first quarter 2013 remains robust.

Money market rates have remained stable. Money market rates
maintained a fair degree of stability since September MPC meeting,
remaining within the MPR corridor. In addition, the spread between
the average maximum lending rate and consolidated Demand,
Savings and Time deposit rates narrowed during the period between
the last MPC meeting and October 2012.

There has been a build-up in foreign reserves and stability of the
foreign exchange. Monetary policy has been effective in stabilizing
the foreign exchange market and reducing speculative demand.
The past monetary policy decisions have also aided capital inflows
to the economy, resulting in buildup of foreign exchange reserves
which stood at $45.68 billion as of November 15, 2012. However, it is
important to continue to monitor global events, especially the effect
of the on-going Euro zone crisis and the handling of the fiscal cliff in
the United State on the Naira, as either issue could destabilize the
global economy and pose downside risk to the exchange rate.

Although global economic environment is improving, some
downside risk remains. Escalating tensions in the Middle East could
put undue pressure on the fragile recovery of the global economy.
While oil prices have remained high and stable, the supply side
factors such as geo-political tension in Middle East could pose
downside risk to growth recovery. Although there are some signs in
the United States with moderate growth, improved unemployment
numbers and recovery in the housing market, there are still some risks
to global growth, as the Euro zone is quickly sliding into recession. In
emerging markets, growth momentum is slowing. Although this
could be a reason for monetary easing, these developments
constitute a major risk to the domestic economy. In the event that
such risk crystallizes, it would soften demand for crude oil, hence
reduction in fiscal revenue and potential balance of payment
challenges. It is expedient for policy makers to continue to monitor
developments and put appropriate measures in place to cushion
the adverse impact in the event of its crystallization.

Based on the above, I am in support of the current stance of
monetary policy to sustain improvements recorded in 2012 as well as
mitigate some of the identified risks. Even with declining core
inflation, there are still real inflationary threats in the coming months. I
will therefore support a no increase in Monetary Policy Rate (MPR)
and Cash Reverse Requirement (CRR).

2.0 GARBA, ABDUL-GANIYU
Decision
I vote to hold.
Justification
1. The game changing mix of policies and institutional and
administrative changes implemented after the July MPC have
been having desired policy impacts: interbank rates have
stabilized within the policy band (±200 basis points around MPR),
the exchange rate has remained stable and core inflation is
trending down from 15.2% in June 2012 steadily every month to
11.7% in October 2012. As the year comes to an end, a major
policy shift is not desirable. It is wise to stay the course more so,
given the pervasive uncertainties in the global economy in fourth
quarter of 2012 (failures of the EU to resolve its sovereign debt
crisis) and in the first quarter of 2013 (fears of the US falling off the
fiscal cliff).
2. There are however, several global and domestic trends as well as
the strategic behaviors of economic players deserve closer
monitoring and rigorous analysis on a continuous basis.

i. Global Outlook: the global trend of growth, employment,
demand and food prices in fourth quarter of 2012 and the
first quarter of 2013 need to be closely monitored given (a)
the deepening sovereign debt crisis in the EU, (b) the
ongoing recessions in the EU, UK and Japan, (c) the slowing
growth in China, India and Russia, the looming danger of the
US falling off a “fiscal cliff”, (d) the supply shocks to
agricultural
output
caused
by
the
adverse
weather
conditions in the US and Russia in 2012; (e) the quantitative
easing related low interest rates and excess liquidity which
could lead to perverse and potentially damaging flows of
financial
capital
to
and
from
inefficient
and
less
sophisticated markets and (f) failures of key global players to
adopt a cooperative approach to the grand problems of
the world.
ii. National Outlook: (a) allocative inefficiencies in the money
market indicated by the growing interest rate spread and
the perverse structure of “market determined” credit
allocation; (b) the ever present dangers of asset price
bubbles in the capital markets in an era of quantitative
easing in the US, EU and Japan; (c) the growing public
sector debt stock and its crowding-out effects on private
investment and non-debt expenditure; (d) the flow of hot
money; (e) the supply and price effects of the widespread
flood; (f) the high levels of unemployment and poverty and
(g) the state of security.
iii. Behavior of players: Global Fund Managers; Deposit Money
Banks; Central Banks (EU, US Fed, Bank of Japan, China, etc);
Governments (Federal Government; the EU, the US and the
New Leaders in China); wholesale and retail players in the
money market and capital market operators and regulators.

3. The main challenges for Monetary Policy in 2013 are:
i. to deliver price stability conducive to economic growth in an
increasingly uncertain world;
ii. to build stronger cooperative relationships with the fiscal
authorities to strengthen the effectiveness of fiscal and
monetary policies to minimize the current levels of trade-off
between price stability and economic growth/employment
and minimize crowding-out effects; and
iii. to creatively correct the malfunctions in the financial
markets to (a) ensure greater efficiency in the allocation of
credit in the Nigerian economy and (b) following (a),
facilitate greater access by high value-adding and high
employment creating enterprises.

3.0 LEMO, TUNDE
Macroeconomic outcomes since the last MPC meeting of
September 2012 seem to have sent out mixed signals. The risks
confronting the global economy have intensified with downward
revision of growth projections in the USA, India, and China while the
Euro zone and Japan have plagued into recession. As a result the risk
of external shock is high with the possibility of softening in the price of
crude oil in the medium term although the present crisis in the Middle
East is helping to sustain the high crude price.
On the domestic economy, the tightening stance of monetary
policy since the Q3 2011 has considerably succeeded in achieving a
fair degree of stability in the macroeconomy as evidenced by the
deceleration of core inflation for the fourth consecutive month. In
addition, the money market rates have been stable with both the
OBB and the Inter-bank rates oscillating within the corridor of the
policy rate. At the same time, a reasonable degree of stability has
been achieved in the foreign exchange market with significant
reserve build up during the period.
A major concern however, is on output growth. Estimated output
growth at 6.48 per cent for Q3 of 2012 could be adjudged impressive
in the light of global developments but it represents the continuation
of a downward trend, which commenced in 2010 and therefore
needs to be halted. Based on the gains of the prevailing tight
monetary policy enunciated above as well as output concern, it
could be apt to consider commencement of loosening stance of
policy.
The foregoing notwithstanding, there still exists upside risks to inflation.
First, headline inflation which moderated up to the end of Q3 2012
commenced upward trend in October, driven largely by imported
food items. High global food price is still a major concern due to
severe weather conditions in US, Europe and Central Asia which is
complicated by the upward adjustment of tariff on imported food
items in the domestic economy.
Second, there was unprecedented and highly devastating flood in
the Q3 of 2012 with severe impact on food output and possibility of
supply shock inflation. Empirical evidence has not spelt out clearly
how long the lag effect of the flood would persist but, intuitively, it
would definitely extend into the latter part of fiscal 2013 with
implication on food inflation as well as headline inflation.
Third, the moderation in global energy prices notwithstanding, the
international price of crude oil still remains elevated and may likely
remain in the current trajectory up to the early part of fiscal 2013,
due to conflict in some of the oil producing countries across the
globe. This development would invariably increase fiscal revenue
with implication of higher than anticipated liquidity injection the
remaining part of 2012 and the early part of 2013. In addition
capital budget implementation by Q3 was about 35 per cent, which
combined with the pressure on the executive by the National
Assembly over the implementation of capital budget may suggest
accelerated public sector expenditure in the next 3-5 months.
In the light of the need to sustain the gains from the prevailing
tightening stance coupled with the threats to inflation as pointed
above, I am of the view that it may be necessary to monitor evolving
developments up to the early part of fiscal 2013 before any
consideration of loosening of monetary policy stance.
Consequently, I propose that the current tightening stance be
maintained by retaining both the MPR and the CRR at 12 per cent.

4.0 MOGHALU, KINGSLEY CHIEDU
There are several seemingly contradictory signals in the economy
that form the context for the decision of the Monetary Policy
Committee as we near the end of 2012. On one hand, core inflation
has continued to decelerate, although at 12.40 per cent it remains
higher than the prevailing Monetary Policy Rate (MPR) of 12 per
cent. Nigeria’s Gross Domestic Product (GDP) for fiscal year 2012 is
6.61 per cent, down from the earlier projected figure of 6.85 per
cent. This indicates a slowdown in output growth, although growth
remains robust. The Euro zone is back in recession, the recovery of
Asian
economies
has
been
weak,
while
emerging
market
economies such as China have slowed down. And we have seen
increasing evidence of a trend of fiscal prudence by Nigeria’s fiscal
authorities.

These developments would ordinarily argue for an end to the
monetary tightening stance by the MPC. But there are strong
countervailing currents that argue for the Committee to remain
cautious. Chief among these is the fact that headline and food
inflation have increased, at 11.70 per cent and 11.10 per cent
respectively, up from 11.30 per cent and 10.20 per cent. These are
significant numbers, even if the causal impact of the recent flood
disaster in a large swathe of the country might imply that this is a
temporary phenomenon. The fact that imported food prices have
risen as a result of an increase in global food prices means that this is
not a time to lower rates. That cause of action would send the
wrong signal of a premature end to the MPC’s tightening stance.
Nigeria’s external reserves are on the upswing, the naira exchange
rate has been stable, portfolio investment inflows have increased
markedly, and we now have real interest rates relative to inflation.
All this has been achieved by a tight monetary policy over the past
18 months, and the need remains to beef up the country’s buffers in
order to reduce uncertainty. Moreover, it appears almost certain
that
government
would
like
to
remove
petroleum
subsidy
completely, even if this decision may be postponed in the near term.
The geopolitical situation in Middle East, in particular as it concerns
Iran, may evolve in ways that lead to increased oil prices, with
implications for the Nigerian government’s liquidity. Should the MPR
be raised, then? Again, I do not believe it should, in particular
considering the possible implications of a further rate hike for growth
and the widening gap between deposit and lending rates offered
by Nigerian banks. This is a matter of valid concern, but the correct
response may not be a downward review of the MPR at this time.
Rather, the challenge can and should be addressed through other
methods related to the Cash Reserve Ratio (CRR) for banks.
My position, then, is that, given this backdrop, the MPC should
neither increase nor lower the MPR and other monetary aggregates
at this time. Rather, the committee should continue to watch the
economic situation into the coming year. Despite the arguments in
favour of loosening monetary aggregates, and a recognition that if
those arguments hold, the MPC would have to seriously consider
moving into a more accommodative monetary stance, I would not
automatically assume such a course of action at this time.
The MPC should go into a sustained monetary easing mode only in
the event of a sustained, across - the - board reduction of inflation
indicators, another major global recession, or when Nigeria’s power
sector reforms have gained traction and begun to address the
structural problems created in the economy by the absence of
adequate power supply, including its structural contributions to the
cost of doing business. It is important to avoid knee-jerk reactions
and the urge to tackle structural problems such as the high cost of
doing business and excessively high lending rates only through
monetary policy. Such an approach is neither sustainable nor
transformative.
For these reasons, I vote to retain the MPR at 12 per cent with a
corridor of +/-200 basis points, retain the CRR at 12 per cent, and the
Liquidity Ratio at 30 per cent.

5.0 OLOFIN, SAM
The newly released NBS figures on major macroeconomic indicators,
project overall GDP growth rate at 7.09% for Q4 2012, while the
projection for the entire year shows a decline from 7.45 in 2011 to
6.61%. Comparing staff estimates for October 2012 with three year
averages over the preceding periods, real GDP growth rate is
projected at 6.48% as against 7.46%; real non-oil GDP is projected at
7.89% compared with a three year average of 8.56%; while headline
inflation is projected at 11.70% compared with 12.0%. Food inflation
is projected at 11.0%, as against 13.07% three year average, while
core inflation stands at 12.40%, compared with 10.97% three year
average. What can be inferred from these figures is that there is
some degree of deceleration in GDP growth rate, even if it still
appears quite robust.
Secondly, even though headline inflation may have increased
slightly by less than a percentage point compared with the figure for
Q2 2012, there is some noticeable trending downwards, even if the
rate still remains at a two digit level. These figures must also be
considered against the back-drop of the worst case scenario model
projections made earlier in the year, that put headline inflation in the
neighbourhood of 14% in Q1 2013. Core inflation on the other hand is
projected at 12.4%. This is lower than the 14% plus average recorded
over Q1 – Q3, 2012, but still significantly higher than the three year
average of 10.97 percent, suggesting a rising trend. Thus we have
mixed trend indicators in respect of prices, while income growth
shows a declining trend even if it is not at an alarming rate.
The recent floods, whose impacts are still being investigated by the
NBS and some development partners, may result in further decline in
food production and over-all GDP growth rate. This would put further
pressure on food prices and food inflation component of CPI. The
vexing issue of fuel subsidy that is far from resolved remains a major
downside risk to current seemingly benign inflationary pressures, the
rising component of imported food notwithstanding.
Given the fact that the primary focus of our alternative policy
considerations centres around the trade-off between maintaining
price stability and considerations for growth, there can be justifiable
argument in the present circumstance for switching policy focus. This
would call for shifting from the hitherto tightening stance to an
accommodative monetary easing stance, to encourage growth.
This would obviously suggest first and foremost, the need to
commence a gradual lowering of MPR to pre-tightening levels of 6-8
percent. This would be very much desirable especially from the
perspective of small scale enterprises, who are the major promoters
of job-creating growth.
It is however doubtful if this would bring about an immediate
significant bridging of the worrisome yawning gap between deposit
and lending rates, on which moral suasion seems not to have made
any significant impact either. This yawning gap must continue to be
an issue of great concern, for as long as it persists, especially in the
face of rising profits for DMBs, little of which is passed on to
depositors. It would also continue to generate concerns, from the
perspective of small-scale enterprises not being able to access
credit at high prohibitive lending rates.
As much as commencing the lowering of the MPR, or beginning to
reverse our tight monetary policy stance may appear desirable, it
may be premature at this point in time. This is due to a number of
reasons which are not unconnected with the fundamentals of the
economy. As we have emphasized time and again, the economy
essentially still remains highly import-dependent, with government
revenue relying heavily on earnings from a single export commodity
that is highly vulnerable to any major external shock. Consequently
the unresolved crisis in the Euro zone cannot be ignored. There are
no strong prospects of the emerging economies of China and India
picking up any slack in demand from the country’s major trading
partners including the U.S.
In the short-run, happenings in the Middle-East may prop up the
price of oil, but it is doubtful if upward trend in oil prices can be
sustained in the medium term. Consequently any significant decline
in all prices may be capable of destabilizing the economy, and
wiping out the recent gains, from what has been a highly successful,
well focused, and rigorously implemented monetary policy stance.
Such gains include a stable exchange rate, declining headline
inflation, a stable financial system, and significant accretion to
foreign exchange reserves. There has also been significant progress
in the efforts of the fiscal authorities towards ensuring fiscal
prudence, and shifting budget emphasis away from recurrent
expenditure, to capital expenditure. This is critical for dealing with
the major structural and infrastructural constraints (particularly
energy) that continue to inhibit growth and job creation in the real
sector.
Given the present state of the economy, there may be no
overriding need to embark on monetary easing prematurely, only to
fall back to a tightening stance, if existing potential inflationary
threats do materialize. These include threats from rising food prices
(domestic and foreign), possible further removal of fuel subsidy, and
electricity tariff adjustment among others. The enormity of the
potential destabilizing effects of any major external oil shock calls for
a prudent policy focus. This would require among others, that we
continue to take advantage of current level of oil prices to further
boost our external buffers; blocking any loop-holes and sources of
leakages that may mitigate against this; striving to ensure stability in
exchange rates; and realizing a sustainable positive real interest rate,
to enhance growth in both foreign and domestic direct investment.
One would therefore vote for our maintaining the status quo at this
meeting, as we keep a close watch on both domestic as well as
external developments between now and our next meeting in
January.

6.0 SALAMI, ADEDOYIN
In the run-up to this meeting, there was a strong tide of opinion in
favour easing monetary policy or at least signaling that the
Monetary Policy Committee (MPC) would join other Central Banks in
reducing policy rates. Inflation and activity data released, by the
National Bureau of Statistics (NBS), in the past few days served to
muddy the waters. Having slowed for three consecutive months,
Headline inflation accelerated to 11.7percent in October from
11.3percent the previous month driven higher by rising food prices.

In contrast, at 12.4percent, Core Inflation recorded its third
consecutive month of deceleration. Concern at higher Headline
Inflation coupled with Core inflation still above the Monetary Policy
Rate would underlie a plausible case for some tightening Staff
forecast show Headline Inflation rising to 12.8percent for November
thereafter slowing continuously to 7.2percent at the end of March
next year. A similar trend is projected for both Core and Food prices.

The outlook for inflation beyond the immediate period, baring a
shock, thus looks benign. At almost the same time, data on
economic activity in Q3 showed a reduction in the rate of growth to
6.48percent from7.37percent a year ago. Placed in the context of
sharply higher reserves, stable exchange rates, sluggish growth in
credit and high unemployment, there is good reason to commence
the easing of monetary policy. In other words, the data background
to this meeting provided, in the same breath, support for easing or
tightening policy.

In voting to retain the statusquo, I am persuaded by a need to see
whether the time until the January 2013 meeting of the MPC
provides greater clarity as to the direction of domestic risks. While the
downside risks to growth in the global economy remain real and
worrisome, the geopolitical events and cycle of easing by major
Central Banks suggest that the risks to global crude oil prices are
minimal in the near term. Global food prices pose a threat to our
inflation ambitions. Estimates by the Food and
Agricultural
Organization (FAO) of the United Nations point to a 3 percent drop
in production of Cereals in 2013 as a result of climatic conditions –
drought in Europe, US and Central Asia coupled with flooding in
Thailand and India. However, my primary concern is for better
understanding of the direction of local risks.

Perhaps the biggest concern in my judgment lies in the fiscal space.
The extent of spending in the final weeks of this year and the details
of the 2013 Appropriation Act will provide an indication as to the
direction of fiscal pressures. While the Federal Government seems to
accept the need for fiscal consolidation, it is not clear that its
ambitions are shared by the National Assembly. 2013 will see
enforcement of new import tariffs for wheat and rice. A further rise in
electricity prices and the challenge of pricing petroleum products
are on the immediate horizon.

As we look to the New Year, a key feature of the background for
Monetary Policy will be responding the challenge of stimulating
contributing to stimulation of output growth within the price stability
mandate. Monetary aggregates are already showing a preference
by domestic investors for holding cash – not surprising given the
tightness of monetary policy. Furthermore, the rising intermediation
spread will need to be addressed. While rising gap between deposit
and lending rates is good for bank profitability, in the context of
slower activity growth, it confirms that the productive sectors
continue to be second-best in bank allocation to risk assets.
7.0 UCHE, CHIBUIKE
During the last MPC meeting held in September 2012, I voted for the
retention of a double digit MPR. Specifically, I voted as follows: (1) to
retain MPR at 12 percent with interest rate corridor of +/- 200 basis
points; (2) to retain CRR at 12 percent; and (3) to retain Liquidity
Ratio at 30 percent. At the time, I made it clear that my expectation
was that MPC would begin to ease the above monetary policy
stance with the main objective of encouraging real sector
development and without compromising macroeconomic stability in
the very near future.

In the light of the mixed signals from available data with respect to
the possible future direction of inflation and economic growth, I
have now come to the careful conclusion that it would be
premature to vote for the easing of the current monetary policy
stance of the CBN on this occasion. At the very least, this would help
prevent any hurried policy reversals that we may have to undertake
should, as I expect, inflation begin to trend upwards in the near
future.

Although in recent times we have seen amelioration in the rate of
core inflation, food and headline inflation have continued to rise.
The above conflicting signals have further been complicated by the
global economic slowdown which has refused to go away. Europe
for instance is now officially in a recession while economic growth in
other major economies has slowed down remarkably. Although the
price of oil, the pillar of our mono-product economy, has continued
to rise in recent times, existing evidence suggests that this has more
to do with threats to supply channels rather than international
demand for the product. There is thus the possibility that the high oil
prices that our economy is currently enjoying may well be
temporary.

I am also concerned about the continuing security challenges in the
country and its impact on economic growth and development.
More troubling however are the possible implications of the recent
national flood disaster for both food security and inflation in the
coming year. Although the jury is still out on this issue, I am of the
view that it would be an error to brush it aside. With the current
increase in imported food inflation, I believe that it is safe to predict
that the recent flood disaster can only lead to additional pressures
on inflation in the near future.
Admittedly available evidence suggests that our double digit MPR
and other complimentary monetary policy tightening instruments
have in part been responsible for the high lending rates especially to
small and medium scale businesses. Despite this, it is important to
acknowledge
that
the
insatiable
appetite
of
the
Nigerian
Government for borrowing has helped to create the perverse
incentive for banks to invest in risk free Government securities to the
detriment of credit to the real sector. It is also not surprising that the
above unfortunate scenario has led to the increase in foreign capital
flows to Nigeria. History however teaches us that any such increase
that does not result in the promotion and development of the real
sector cannot be sustainable.
Given the obvious limitations of monetary policy is a structurally
defective mono product economy, I am of the view that our policy
options
for
engendering
economic
growth
and
promoting
macroeconomic stability may, at least to some extent, be limited to
exploring ways of reducing the cost of credit to small and medium
scale enterprises. As I stated in my decision statement at the last
MPC, I believe there is still some room for regulatory manoeuvre in
order to ameliorate the credit environment for the real sector.
One obvious problem that should be addressed is the increasing
margin between deposit rates and lending rates offered by Nigerian
banks. As I have consistently maintained, it is troubling that rising
interest rates have only led to increased margins between deposit
and lending rates. A margin of almost 20 percent for the majority of
bank customers is clearly not supportive to financial system savings
and the general health of the financial sector. It also adversely
impacts on the health of the real sector. Clearly, this is
unacceptable. We therefore need to consider putting in place some
kind of controls on the intermediation margins of Nigerian banks.
One strategy worth exploring in the above direction would be to
mimic bank’s interest rate practices in the design of CBN reserve
remuneration policies for such banks. The two possible outcomes
from the above policy choice: reduction in lending rates or increase
in savings rates would be of great benefit to our economy. In
conclusion, it is clear that my decision to vote for the maintenance
of the current tight monetary policy stance highlights the limitations
of monetary policy in a mono product rentier economy.

8.0 SHEHU, YAHAYA
I vote to maintain the Monetary Policy Rate at 12%. My position is
based on the mixed signals in the domestic and world economy as
well as uncertainties and factors not readily amenable to monetary
policy.
Mixed Signals
World economic recovery is weakening and the Eurozone countries
are in recession, characterized by declining output trends and large
scale unemployment. Most of the other countries which account for
a large proportion of trade with Nigeria are either recovering slowly,
or experiencing slower growth rates. International demand for oil
may experience downward pressure due to the anaemic growth
and therefore weak demand in the major consuming countries,
coupled with prospects for increased production of shale oil in the
US and crude oil in many African countries. Yet the tensions in the
middle East and Iran are exerting an upward pressure, leading to
two-month high prices of oil in the forward market. In the short term
therefore, it is not clear what the effect on foreign exchange earning
earnings and reserve will be.
In the domestic economy, growth prospects remain positive,
although with a dip in 2012, with GDP growth rate expected at 7.09%
as compared to 7.45% 2011. Gross fixed capital formation shows an
upward trend. Manufacturing production, though still relatively low, is
stable. The main risk comes from farm output.
Headline and core inflation are trending downwards in the last few
months as compared to the first half of the year. Imported inflation
presents a mixed picture. While prices in Asia are stable or declining
and prices in the Eurozone area are softening, the substantial
decline in cereal production, particularly rice and wheat in some of
the major producing countries, coupled with import tariffs may
contribute to imported food inflation.
On the fiscal side, the level of capital budget execution in the first
half of the year has been low, which raises some concerns as to the
likelihood of a massive increase in the second half of the year which
can stoke inflationary pressures. However, there has been a
noticeable improvement in fiscal discipline, including a dramatic
reduction in government borrowing, which bodes well for the pace
and pattern of expenditure for the rest of the year and during the
first quarter of next year. The challenge is to effectively and
efficiently direct the expenditure to address the high levels of
poverty and unemployment in the economy.
Clearer Signals
Banking sector credit to the economy has been subdued. The
Naira/Dollar exchange rate has remained remarkably stable since
August 2012 and foreign reserves have been built up substantially to
about US446 billion. The prospects for continuing stability in the
foreign exchange market are therefore good.
A definite area of risk for both growth and price levels is farm output
in the country, which is facing severe threats from the floods and the
on-going security concerns. This is compounded by the prospects for
higher global prices for rice and wheat, which constitute significant
imports in the country. Unfortunately this kind of supply side shock
cannot be effectively addressed by monetary policy in the short run
and it is hoped that its effect would be somewhat muted by the
downward trend in core inflation. It cannot therefore the major basis
for our decision on MPR.
Conclusion
The build-up in external reserves, good prospects for stability in the
foreign exchange market, a small downward dip in GDP growth rate
and core inflation would suggest that there is some room to relax the
MPR. However, mixed signals in the oil market, uncertainties in the
economies of many major trading partners and the threat of
domestic and imported food inflation would suggest a more
cautious approach.
In the light of the foregoing, I vote to maintain the MPR at its current
level of 12%, along with the 2% symmetric corridor.

9.0 SANUSI, LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the
Monetary Policy Committee
I align myself with the vote of other members to hold current
Monetary Policy Stance and maintain rates at present levels through
the end of the year at least.
The inflation figures just released by the NBS send mixed signals. Yearon Year Headline inflation increased slightly from 11.3 per cent in
September to 11.7 per cent in October. Food inflation increased
from 10.2 per cent to 11.1 per cent with imported food inflation
increasing from 14.1 per cent to 15.7 percent, thus reversing what
appeared to be the beginning of a mild deceleration in headline
and food inflation in Q3: 2012. Noticeably, almost all components of
CPI reflected this increase, suggesting that food inflation is pervasive
across a broad range of items. The increase in farm produce prices
at this time is probably a result, in large part, of supply shocks caused
by floods affecting many states in the federation, which not only
destroy production on some farmlands but disrupted the importation
and supply chains.
On the other hand core inflation continued its steady decline from
15.2 per cent in June to 12.4 per cent in October, coming down to
just above the MPR. The sluggish growth in monetary aggregates,
slowdown in credit growth, greater fiscal discipline and stable
exchange rate, have all contributed to this. The NBS acknowledges
that performance of Core inflation is largely on the back of tight
monetary conditions, thus confirming that monetary policy has been
effective in keeping inflationary pressures in check.
GDP growth remains robust but below the comparative period in
2011 and the slowdown is consistent with global trends. External
reserves have increased to over $45 billion and for the first time in
many years the actual deficit from Federal Government Fiscal
operations between January and August (N530.34 billion) was in line
with the proportionate budgeted deficit (N531.17 billion). It is hoped
that the National Assembly will listen to wise counsel and not
increase the $75/barrel oil price benchmark for 2013 budget.
Given the adverse impact of very high interest rates on the Balance
Sheet of both public and private sectors, one can understand the
clamour for lower interest rates given the moderation in core inflation
and healthy position of Reserves and slowdown in output growth.
However, the global environment remains fraught with uncertainties.
The US is yet to resolve issues around the “fiscal cliff” and the Balance
of Power in Washington means that the President is unable to push
his agenda without support from the Republicans who control
Congress. The Eurozone seems to take one step forward and two
steps back, with the ECB offer to buy Sovereign Bonds to reduce
borrowing costs for troubled countries now tied to conditionalities
that have led to widespread protests. Divisions are emerging in a
very public manner between countries like Germany and the
Netherlands on the one hand and others like France and Italy on the
other over the appropriate extent and pace of austerity. Even the
IMF is in open disagreement with the Germans. And, to make
matters worse, austerity in the periphery and the collapse of
demand is affecting growth in Germany itself.
Emerging market economies like China and India are also slowing
down with potential financial risks in China emanating from a
potential real estate bubble which is being fuelled by easy money
from the People’s Bank.
The net effect of all these considerations is that we do face risks to
global commodity prices as well as to the financial condition of
investors in Europe and the US. We therefore need to remain focused
on building buffers in the event of a reversal of capital flows.
Staff projections indicate that Headline inflation and Food inflation
may still rise in December but decelerate in January, while Core
inflation continues its deceleration if current stance is maintained. It
would seem to me inappropriate to terminate the tightening cycle
at the first signs of success and risk policy reversal if circumstances
take a turn for the worse in the short term.
It is self-evident that further tightening will not be the solution to the
structurally-induced rise in food prices but we should not then, on
account of this argument, abandon a policy that has thus far reined
in Core inflation successful, thus compounding the problem as it
were.
The slowdown in output growth, in my opinion is best addressed
through other means. Improving the quality of government
spending, given the volume of banking sector investment in
government debt, is key to output performance since the private
sector is being crowded-out. Government also needs to improve
investment environment by addressing cost of doing business,
bureaucratic inefficiency and corruption in the public service. Finally,
reform of the Power sector and Agriculture must be stepped-up, with
Government remaining faithful to its commitments and obligations to
investors. In my view, these matters rank far higher than interest rate
decisions in their impact on growth.
Having thus considered all of the factors above, it appears to me
prudent at this point to resist the pressure to loosen policy, and
consolidate on the gains made thus far. Depending on the
performance of the domestic economy and global developments,
we will review the situation in January, 2013 and act appropriately.
I therefore vote to hold MPR at 12.0 per cent and CRR at 12.0 per
cent.