CENTRAL BANK OF NIGERIA

..

OF THE MONETARY

&

CENTRAL BANK OF NIGERIA COM
OF THE MONETARY POLICY eruaasen

efary Policy Committee of the CBN met today and decided to maintain fhe
) Rediscount Rate (MRR) at 14.0 per cenf.

The Monetary Policy Committee (MPC) met on 9th August, 2006. The MPC

a reviewed the major macroeconomic developments and the implementation

of fiscal, monetary and exchange rate policies in the first seven months of
9006, as well as the challenges for the rest of the year. The meeting, the third

jin the year, lasted four hours. The MPC noted with satisfaction the
improvement in the overall macroeconomic environment during the review

period, and restated its commitment to ensuring monetary and price stability
in the rest of the year.

inflation

The MPC noted that at end-June both the headline and core inflation rates
had decreased to 8.5 and 13.6 per cent from 12.0 and 16.3 per cent at endMarch, 2006 respectively. It, however, noted that core inflation at 13.6 per
cent was still unacceptably high. Furthermore, the MPC observed that the
overall downward irend in inflationary pressure reflected the effects of
monetary policy tightening to address the excess liquidity in the second
quarter as well as the appreciation of the exchange rate. In addition, the
early harvest of some agricultural food products, sustained stable prices of
petroleum products in the domestic market and the narrowing of the BDC
market premium all helped to dampen inflationary pressure in the review
period. Nevertheless, some threats to the sustenance of low inflation still exist;
they include the planned supplementary budgetary expenditure of the
Government, and rising private (autonomous) inflows, both of which are likely
to shore up liquidity in the system.

Gross domestic output (GDP} was low reflecting the decline in oil production
Gnd the seasonal slowdown in agricultural production. Economic activity,
however, is projected to pick up in the months ahead, during which the
harvesting of crops (the major agricultural sector growth driver) would
commence in earnest.

The MPC noted with satisfaction the sustained stability of the nairg follo

the Bank's liberalization of the forex market since March 27, 2006. The p “win
exchange rate in the BDCs has continued to appreciate. From US $] 1/N] 151g
in March, the naira appreciated to US $1/N130.00 at end-June 2006, g
further to $1/N128.60 in July. Against the DAS exchange rate, which &

stabilized at about US $1/N128.00, the BDC market premium has dropped ee
below 2.0 per Sert. The MPC restated iis g | infic
ommiiment to sustain the BDC exchange rate premium within the 3.0 be mo
cent margin. :
DECISION:
i The com
Following the US $4.6 billion exit payment to the Paris Club in April, the STOCK of (a) ma
external reserves stood at US $32 billion at end-April, and rose to US $38 billn mo
at end-July 2006. fp) PI
oth

Brodd money (M2) grew by 34.69% as at end-July 2006 over the Decembe Ist,
2005, which represented an annualized growth rate of 59.46 per cen (c) sus|
compared with the target of 15.0 - 17.0 per cent for 2006. The rise in money (d) rec
stock was due to a combination of factors which included: the credit to the
government which increased by about 16.0 per cent in June, as against -0 je) OPI
per cent programmed target, reflecting sustained expansionary fisca a) SPI
operations; The net foreign assets also continued to increase. (g) _ susi
Thank you
Growth in aggregate domestic credit (net) was 15.2 per cent in the first sik
monihs. This increased to 16.9 per cent at end-July 2006 and 28.96 per cent : ' “Prof C. Sol
on annualized basis. The credit development was driven largely by DMBs 4 Governor
credit to government through investments in treasury securities. Credit to the i Central Bc
private sector, however, fell short of the target for the year cdi
August 20(

At end-June 2006, reserve money was N79?4.00 billion, which was lower than

the target of N800.00 billion for the second quarter 2006. The level of RM was
also within the target in July.

The MPC noted the general decline in banks’ deposit and lending rates
following the excess liquidity in the system. Consequently, the spread

between the average savings deposit and maximum lending rates fell from

110)

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37 cent

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CURRENT CHAL
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“DECISIONS
he Commitiee irc:

entage points in December 2005 to 15.2 percentage points at the

16.2 perc ,
2006, and slightly further down to 15.1 per cent by end-July.

is to low inflation and monetary management still exist. They include:
increasing Cost of liquidity management; rapid growth in M2; planned extrabudgetary spending by the government; increasing autonomous (private)

inflows. The expansionary fiscal operations remain a major source. of risk to

monetary policy.

maintain the MRR at 14% with a proviso to review it should the threat to
monetary policy continue.

approve a new framework for monetary policy implementation. The IT and
other logistics requirements are to be sorted out between now and October,
9006. Pilot implementation is expected to commence on or before November
|st, 2006

sustain the CBN’s zero tolerance to lending to government

reaffirm that there is no control on interest rate or pegging of lending rate to
the MRR.

approve operational guidelines on the CBN Discount Window

approve guidelines for discount window operations in FGN bonds and

sustain the on-going liberalization of the forex market.

Thank you for your kind attention.

Prof C. Soludo

/ DMBS fF Governor
‘tothe f = Central Bank of Nigeria,
F Abuja.
August 2006
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