Central Bank of Nigeria Communiqué No. 85 of the Monetary Policy
Committee Meeting of Monday and Tuesday, September 17 and 18,

The Monetary Policy Committee (MPC) met on September 17 and
18, 2012, with 10 out of the 12 members in attendance. The
Committee reviewed the conditions and challenges that confronted
the domestic economy during the first eight months of 2012 against
the
backdrop
of
international
economic
and
financial
developments with a view to reassessing monetary policy options in
the short-to- medium term.
The International Economic Developments
The Committee noted that the global economy showed signs of
further weakness in the last three months, with the latest data not
showing any evidence of improvement up to the beginning of the
third quarter of 2012. The Committee also observed that the weak
growth resulted from considerable financial market fragilities in the
euro area with resultant negative spillover effects to other regions,
uncertainty resulting from the Eurozone crisis as well as poor

macroeconomic performance in other advanced economies.
Rising food and energy prices is also a contributory factor.
In July 2012 IMF World Economic Outlook (WEO) update projected
that global output would moderate to 3.5 per cent in 2012, which is
0.1 percentage point lower than the forecast of April 2012. Growth in
advanced economies was projected to decline from 1.6 per cent in
2011 to 1.4 per cent in 2012, with the slowdown being most severe in
the peripheral economies, where the dampening effects and
uncertainty from tighter financial conditions are strongest.
In the US, real GDP grew at an annualized rate of 1.5 per cent in Q2
of 2012, down by 0.5 percentage point from 2.0 per cent in Q1. The
sluggish
growth
was
primarily
due
to
declining
aggregate
consumption, government spending, and negative terms of trade.
The euro zone is on the brink of a double-dip recession following the
contraction in output between April and June. Real output across
the 17-nation bloc fell by 0.2 per cent in Q2 of 2012 while signs of
further contraction are in the horizon. Rising unemployment and
large scale fiscal retrenchment coupled with increased taxes in a

number of countries constrained aggregate demand leading to cutback on investment and low export growth. Unemployment level
across the zone has attained a record high of 11.3 per cent, the
highest since 1995, with Spain recording the highest level and Austria
the least. Weak financial markets and the persisting sovereign debt
crisis as well as rising energy prices led the European Central Bank
(ECB) to retain its main refinancing interest rate at 0.75 per cent. EU
members remain cautious about the ECB’s Outright Monetary
Transactions scheme, which is based on strict adherence to austerity
measures and fiscal consolidation pact.
In Asia, most economies recorded significant slowdown in economic
activity up to Q2 of 2012, mainly on account of weakening exports
and investment. Export growth has moderated, reflecting the
sluggish demand from Europe while investment remained weak due
to heightened volatility of capital flows and the lagged effects of
tighter domestic monetary policies. China’s real GDP growth slowed
to 7.6 per cent in Q2 from 8.1 per cent in Q1 due mainly to decline in
net exports. Growth moderated in Japan especially in Q3 due to

softening in manufacturing activity. India’s real GDP, year-on-year,
moderated to 5.5 per cent in Q2 of 2012 from 6.1 per cent in Q4 of
2011, mainly as a result of deceleration in private consumption.
Overall, the growth trajectory for the remainder of the year tends
toward a downturn, as downside risks, including weak external
demand, elevated price levels, widening twin deficits, falling
investments, and rising interest rates, remain heightened.
Robust economic activities in the MENA and Sub-Saharan Africa
regions would partly offset the declining output growth in the
advanced and emerging markets in 2012. Real GDP growth was
projected at 5.0 per cent in each of the regions, underpinned by
strong natural resources prices, new natural resources exploration
and production in several countries, recovery from drought in the
Sahel and parts of Eastern Africa, strong post-conflict recovery in
some countries, improved governance practices and growing
disposable income. Despite these developments, growth in the
regions faces significant downside risks on the back of increased
global uncertainties.

The Committee believes that the recent quantitative easing
measures by the European Central Bank and the US Federal Reserve
System could be responsible for the high crude oil prices in the
international market. It highlighted the possible increase in carry
trade and the risk of a bubble in the domestic capital market.
Domestic Economic and Financial Developments
Output
Recent macroeconomic data indicates that the economy is
performing better than forecasts although growth in the first two
quarters of 2012 has remained consistently below the corresponding
growth rates in 2011. The provisional real GDP growth rate from the
National Bureau of Statistics stood at 6.28 per cent in Q2 of 2012, up
from 6.17 per cent in Q1 2012 but lower than the 7.61 per cent
recorded in the corresponding period of 2011. The non-oil sector
remained the major driver of growth recording a 7.50 per cent
increase in contrast to the oil sector, which contracted by 0.73 per
cent during the period. Overall GDP growth for fiscal 2012 has been
revised upwards to 6.77 per cent from the earlier projection of 6.50

per cent. The Committee welcomed the promising growth
performance although it expressed concern that the overall output
growth projection for 2012 is still lower than the 7.45 per cent
recorded in 2011.
The growth drivers within the non-oil sector remained agriculture;
wholesale and retail trade; and services; which contributed 1.94,
1.69, and 3.16 per cent, respectively. The Committee noted that the
relatively robust growth projections despite the slowing global
economy
reflected
the
continuing
favorable
conditions
for
increased agricultural production, improved security situation and
power supply.
Prices
The Committee observed that the inflationary pressures experienced
during the first half of 2012 appear to be moderating in the third
quarter. The year-on-year headline inflation declined to 11.7 per
cent in August 2012 from 12.8 per cent in July while core inflation
decelerated to 14.7 from 15.0 per cent during the same period. Also,
food inflation declined sharply to 9.9 per cent in August 2012 from

12.1 per cent in July. The significant decline in year-on-year food
inflation was attributed to the decrease in prices of both processed
foods (from 4.2 to 3.6 per cent) and farm produce (from 7.9 to 6.4
per cent). The Committee observed that the inflationary pressures
from the partial removal of petroleum subsidy in January, 2012
appear to have waned in Q3, 2012, and that given the relatively
stable exchange rate regime, the pass-through to domestic prices
was low during the period. The Committee, however, recognized the
upside risk to inflation in the near-term to include increased spending
in the fourth quarter and monetized capital flows following the US
QE3.
Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) grew by 3.50 per cent in August 2012 over
the level at end-December, 2011, which annualized to 5.25 per cent.
The annualized growth rate is significantly lower than the growth rate
of 15.43 per cent recorded in 2011. Aggregate domestic credit (net)
declined by 3.82 per cent in August 2012, annualized to a decline of
5.73 per cent from the level at end-December 2011 level. The

decline in aggregate domestic credit (net) in August 2012 was due
to a huge fall in credit to Government (net), which declined by
246.47 per cent or 369.71 per cent on annualized basis. This
development reflected the combined effects of the significant
growth in Federal Government deposits with the banking system and
contraction on claims to government. The introduction of a Treasury
Single Account (TSA) appeared to have had the desired effect of
reducing government borrowing.
Interest rates in all segments of the money markets rose initially, in
response to the increase in the Cash Reserve Requirement (CRR) by
400 basis points at the MPC meeting of July 23 and 24, 2012. The
rates, however, trended downwards toward the end of the review
period. The inter-bank call and OBB rates, which opened at 17.85
and 14.99 per cent, closed at 14.19 and 13.56 per cent, respectively,
during the review period. Developments in the interest rate structure
indicated that the retail lending rates remained high in August 2012.
The average maximum lending rate increased marginally to 23.76
per cent in August 2012 from 23.45 per cent in July. However, the

average interest bearing deposit rate declined to 6.24 per cent in
August 2012 from 6.64 per cent in July. Thus, the spread between the
average maximum lending rate and the average interest-bearing
deposit rate widened to 17.53 per cent in August 2012 from 16.81 per
cent in July. The Committee expressed concerns that lending rates
have remained high and enjoined the Bank to sustain its efforts
towards the reduction in interest rate spread, while stabilizing
interbank rates to sustain liquidity and facilitate intermediation in the
banking system. The Committee noted that this can only be
achieved by sustaining the current efforts at reducing overheads in
the banking industry and deepening capital market reforms to
diversify sources of finance for the real economy, and complement
bank loans.
The Committee observed that the recovery in the Nigerian capital
market continued during the review period, as equities market
indicators were positive. The All-Share Index (ASI) increased by 9.96
per cent between June 29, 2012 and August 31, 2012, while Market
Capitalization (MC) increased by 9.64 per cent during the same

period. Equity Market Median PE ratios at 9.86 in August 2012, fell
below the long-run median of 10.77 by 0.91 or 8.44 per cent,
suggesting bargain valuations and an imminent rebound. The
Committee observed that the performance of the NSE during the
period was consistent with the global trends, especially in the wake
of monetary expansion.
External Sector Developments
At the Wholesale Dutch Auction System (WDAS), the exchange rate
during the period, July 25 – August 31, 2012, opened at N157.40/US$
and closed at N157.36/US$, representing an appreciation of N0.04k.
The appreciation was due to the combined effects of the increase in
Cash Reserve Requirement, reduction in the Net open position and
the policy barring DMBs/Discount Houses from accessing Lending
windows (SLF and Repo) and WDAS simultaneously. At the interbank
segment, the selling rate opened at N160.05/US$ and closed at
N158.15/US$, representing an appreciation of N1.90 or 0.01 per cent.
The appreciation experienced in this segment was due to increased
supply of foreign exchange by oil companies to the interbank

market. At the BDC segment of the foreign exchange market, the
selling rate opened at N163.00/US$ and closed at N161.00/US$,
representing an appreciation of N2.00k or 0.01 per cent for the
period. The appreciation recorded in this segment was traced to the
low demand of foreign exchange by end users vis-à-vis the high
supply of foreign exchange at the interbank market and the
apparent taming of speculative activities.
The Committee noted with satisfaction that the premia between the
rates at the WDAS and the interbank; and between the wDAS and
the BDCs; narrowed towards the end of the review period, and
therefore encouraged the Bank to sustain and complement existing
measures to discourage speculative demand in the market. In
general, the Committee noted that the decisions taken at the last
meeting of the MPC had produced the desired result.
In the same vein, the Committee expressed satisfaction with the
significant accretion to external reserves during the period. Gross
external reserves as at September 5, 2012 stood at US$ 41.81 billion,
representing an increase of US$ 6.40 billion or 18.07 per cent above

the level of US$35.41 billion at end-June 2012. External reserves
increased by US$ 8.88 billion or 27.0 per cent on a year-on-year basis
compared with US$ 32.93 billion at end- August 2011. The increase in
the reserve level was driven mainly by proceeds from crude oil and
gas sales and crude oil related taxes. The foreign reserves level could
finance over seven months of imports.
The Committee’s Considerations
Given developments in the global and domestic economy and the
financial markets, the Committee noted that the weak global
growth indices called for cautious optimism by policymakers. The
resolution of the euro area debt crises remains a major concern
even with the approval of the efforts of the European Central Bank
to address the debt crises in the euro area by the German
Constitutional Court. It further noted that its decisions at the July
MPC Meeting appeared to have had some positive impact in a
number of areas, namely: a deceleration in year-on-year inflation in
August 2012, stability of short term interest rates around the Monetary
Policy Rate (MPR), buildup in external reserves and stability in the

exchange rate. However, core inflation is still high at 14.7 per cent in
August. The threat of increased inflow of hot money arising from the
actions of the US Fed to further stimulate the economy through its
QE3 activities and its capital reversal implications were noted.
The Committee noted the rise in oil prices but cautioned against a
hasty deployment of the windfall to immediate consumption as the
trend could be reversed. Monetary policy could not, therefore,
under the circumstance, react to what may be purely temporary
developments.
Despite the threats from a combination of global and domestic
factors, the Committee noted that the level of economic growth in
the third quarter of 2012 remained robust and the year-end forecast
would likely be met owing largely to the improvements in power
supply and the steady progress of reforms, actions in respect of the
alleged fraud in the petroleum subsidy regime and improved fiscal
operations. The Committee noted that these measures, generally
take time to impact the real economy.

With this development, the Committee observed that the inflation
outcome for the remaining period of the year is likely to be lower
than the initial forecast of 14.7 per cent. The Committee would
continue to monitor developments in the price level, and remain firm
in its commitment to price stability as its mandate. The Committee
also noted that the growth rate of real output, though impressive by
global trends, was on the downward trend since Q1 2010 most
especially in the agricultural sector. It was of concern to the
Committee that the declining output in the agricultural sector was
traceable to the security challenges and high intensity of rainfall
which has led to flooding in several parts of the country. It noted that
the measures taken at the last MPC meeting have succeeded in
stabilizing the foreign exchange market as well as enhancing the
build up in external reserves.
Overall, the MPC believes that the current rise in crude oil prices and
the tight monetary policy regime presented an opportunity for
building reserve buffers in the light of the uncertainties surrounding
the global economy.

The Committee, therefore, identified the key policy challenges to
include:
1. Protecting the domestic economy and building external
reserves buffer;
2. Potential large inflow of “hot money” resulting from further
monetary easing in the US and Europe and improved yield on
fixed income instruments;
3. Persisting high core inflation rates;
The Committee noted that this moderation in headline inflation has
not been accompanied by a significant decline in core inflation.
Given the unpredictability of food prices, there is a need to watch
this trend as we approach year-end before altering the present
monetary stance.
Decisions:
In view of the foregoing, the Committee by a unanimous vote
decided as follows:

1. Retain the Monetary Policy Rate (MPR) at 12 per cent with +/-
200 basis points corridor;
2. Retain the Cash Reserve Requirement (CRR) at 12.0 per cent.
3. Retain the Net Open Position at 1.0 per cent.
Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
18th September, 2012

PERSONAL STATEMENTS BY MPC MEMBERS:

1.0 ALADE, SARAH
Headline inflation decreased to 11.7percent in August from 12.8 percent
recorded in July. This decline is driven generally by decrease in food
inflation which dropped to 9.9 in August from 12.1 recorded in the
previous month, as the harvest season commenced. In the international
scene, while growth prospects remain subdued, the announcement by
the Federal Reserve of third round of Quantitative Easing measures and
effort by the Eurozone ministers to tackle the Euro area debt problems all
point to positive developments. On the domestic front, second quarter
GDP growth remain robust at 6.28 percent although lower than recorded
at the corresponding period of the previous year. Inflation is on a
downward trend and international oil prices remain stable. Monetary
policy should adopt a gradual approach to monitor the channel of
transmissions of the events in the Euro area and the US in the coming
months before taking further actions. Based on this, I will support a no
change in monetary policy rate and Cash Reserve Requirement (CRR).

Headline inflation dropped to 11.7 percent in August from 12.8 percent
recorded in the previous month. Domestic inflation has continued to trend
down after a persistent and sustained inflationary pressure, beating most
analysts’
expectation.
This
can
be
mainly
attributable
to
the
commencement of harvest which resulted in the availability of locally
produced food products at lower rate. Staff projections suggest a

temporary easing in inflation for the next two months during the peak of
the harvest season before edging up again by the end of the year.

Gross Domestic Product (GDP) is revised upwards and is projected to grow
by 6.77 percent in 2012. Second quarter GDP growth edged up to 6.28
percent an increased from the 6.17 percent recorded in the first quarter of
the year. The non-oil sector remained the major driver of growth recording
7.50 per cent increase in contrast to the oil sector which contracted by
0.24 per cent during the same period, with agriculture, wholesale and
retail trade, and services as the major contributors.
In the money market, rates responded to the decisions taken at the last
MPC meeting. Inter-bank call and OBB rates which averaged around
15.20 and 14.72 percent respectively, before the last MPC, lowered to an
average of 13.99 and 12.99 percent respectively during the month of
September. The decrease in the OBB and inter-bank rates can be
attributed more to the last monetary policy decisions which increase the
Cash Reserve Requirement (CRR) by 400 basis points. In the Nigerian stock
exchange, activities remain bearish as a result of domestic confidence in
the market.

Policy decision at the last MPC resulted in stability at the foreign exchange
market and buildup of reserve. The additional measures introduced at the
last MPC, brought stability at the foreign exchange market and reduced
speculative demand. The decision also aided capital inflows to the

economy, resulting in buildup of foreign exchange reserves. The impact of
the Federal Reserve quantitative easing measures, could further increase
capital inflows into the economy as capital go after high interest rate.

The global economic environment remains fragile and weak and needs to
be closely monitored. Events in the economies of Nigeria’s trading
partners remain weak and if this condition persists could lead to a
softening in demand for and price of oil with negative impact for oil
revenues. While oil prices have remained high and stable, the supply side
factors such as geo-political tension in the Middle East (Iran) that is driving
the price increase may soften in the medium term. The fallout will be the
reduction in foreign exchange earnings, weakening of the naira, and
pressure on exchange rate. This may further lead to increase budget
deficit and public sector borrowing to finance the expenditure outlays.
Therefore, it is important that a tight monetary stance is maintained to
forestall major downside risk to the economy.

Based on the above, I am inclined to tilt my decision to balance both
global risks and national vulnerabilities. Consequently, I will support a no
increase in monetary policy rate and Cash Reserve Requirement (CRR).

2.0
BARAU, SULEIMAN
A.
Review of developments since the last MPC
A.1 The following developments very clearly reveal that the various
measures taken as part of overall tightening stance on policy
have produced expected results;

Year on Year (YoY) Headline Inflation (HI) trended down
from 12.80% (July) to 11.69% (August). Month on Month
(MoM) HI has however, increased by 0.24% to 0.67%,
respectively.

YoY Food Inflation (FI) has decreased from 12.09 (July) to
9.91% (August). MoM (FI) increased from 0.31 (July) to
0.72% (August).

Core Inflation (CI) similarly declined from 15.04% (July) to
14.71% (August). MoM Core Inflation however, increased
from 0.11% (July) to 0.62% in August.

The Naira appreciated in all segments of the foreign
exchange market. In addition, the premium between
WDAS and BDC rates narrowed to 1.69%.

External reserves peaked at a two year record of US$42.13
billion.

Money market rates have stabilized after the expected
initial volatility.

A.2 Real Gross Domestic Product (GDP) grew marginally from 6.17
in quarter one (Q1) to 6.28% in (Q2). However, this is a decline
when compared to 7.61% recorded in Q2 2011.
A.3 Financial markets in some of the Euro Zone countries continued
to be volatile following the sovereign debt crises. Meanwhile,
we continue to witness slow growth in China and other
emerging market economies.
B.
Discussion/Pressure Points

The successive tightening measures we have taken recently
have very clearly produced the desired results. The issue facing
the MPC today is whether in the light of this development, we
should hold tighten or loosen the stance in policy.

In the first place, even though we were not operating an
inflation targeting framework, the MPC has expressed the desire
to bring inflation to single digit. At 11.7% the YoY Headline
Inflation though far below forecast is in the double digit arena.
Besides, both the MoM Inflation measures and outlook indicate
upside risk. In addition, as we move towards fiscal year end,
public and consumer spending due to festivities could increase,
which largely support this outlook.

We have witnessed appreciation in all segments of the foreign
exchange market. While our objective is to allow the exchange

rate to be mobile within a target band, it is significant to observe
that the forces that have tended to put pressure on the Naira
recently are speculative rather than fundamental. These forces
have been supported by the observed huge liquidity in the
system driven by substantial government spending. This makes a
compelling case for continuation of the current policy stance.

The substantial accretion to our foreign reserves is a very good
development. This has changed market sentiment and has
supported the recent appreciation of the Naira. The passthrough effect of exchange rate on inflation makes it an
important variable in our inflation management equation. This
supports our argument in favour of the maintenance of current
policy stance.

After the initial shock in the money market rates have largely
stabilized following the measures taken at the last MPC meeting.
There is the need to maintain the stability.
C.
Decision
In the light of the need to maintain stability in the money and foreign
exchange markets, the upside risk to inflation and the need to
sustain accretion to reserves, I voted in favour of maintaining the
measures taken at the last MPC as follows:
Maintain MPR at 12%

Maintain the corridor at plus and minus 2% around the MPR
(for SLF and SDP, respectively)
Maintain the Net Open Limit for Banks at 1%
Maintain CRR at 12%


3.0 GARBA, ABDUL-GANIYU
General Observation
1. The timely implementation of the decisions on CRR (from 8% to
12%), Net Foreign Exchange Open Position (NOP) [from 3% to 1%
with effect from July 24th, 2012] and the circulars that changed the
arbitrage game have helped to significantly (a) moderate the
pressures on the Naira and (b) put economic players on notice
that a new era of creative rationality and creative mix of policies
and institutional changes has begun in the MPC.
2. The forward looking actions by the MPIC in the first two weeks
after the July MPC is also highly commendable: it helped to
achieve the desired result which was to change the game and
align choices open to players and associated payoffs to national
macroeconomic goals. It very important that forward looking
actions are sustained.
Outstanding Structural and Institutional Issues Pre-dating Last MPC
3. The slowing growth from 1st quarter of 2010;
the high
unemployment (23.9% and average of 1.8 million adding to the

pool each year); high poverty rates (112.5 Million in 2011) and the
insecurities that have heightened uncertainties and risks.
4. Destructive rationalism in the financial system linked to perverse
incentives and manifesting in (i) high costs, rent appropriation and
allocative inefficiencies, (ii) exposures of DMBs to FGN Bonds; high
market concentration (deposit, credit and capital) and;(iii) the
crowding-out of credit to the real sector.
5. Weak institutions that embed the perverse incentives.
6. Unsustainable growth in public debt, public debt service and high
opportunity costs of current structures of public expenditures.
7. Trends and structures of the money survey in the first three quarters
of 2012:
a.The M1 and Net Domestic Credit (NDC) have trended
downwards in the first eight months with average monthly
growths of -3.6% and -2.0% respectively. These have adverse
effects on private investments and growth.
b.In contrast, Net Foreign Assets (NFA) grown at an average
monthly rate of 6.9% which is good for accumulation of foreign
reserves.
c. It would seem that the increase in NFA is neutralized by a
combination of decline in M1 and NDC . The neutralization of
the positive growth of NFA is necessary to complement the
tight monetary policy of the MPC. But it comes at a cost:
higher interest rates and negative growth of NDC. It may be

important to quantify the opportunity costs in terms of forgone
investment, employment and growth.
d.The three components of Quasi Money (QM) –Savings Deposit
(SD); Time Deposit (TD) and Foreign Currency Deposit (FCD)
have shown different patterns of growth. On average Savings
Deposit averaged 0.7% growth between January to August
2012 compared to 1.7% for Time Deposit and 3.3% for Foreign
Currency Deposit. After the last MPC in July, FCD rose sharply
by 17.4% and TD rose by 5.9% while SD fell by -0.2%. It is
important to look more closely at the trend and structure of
the money survey to ensure consistency with macroeconomic
goals.
Outlook: Inflation and Global Economic Challenges and Policy
Responses
8. Headline inflation trended downwards from 15% in April 2010 to
9.3% in August 2011 and 10.3% at end of 2011. However, the two
supply shocks of 2012 (rise in PMS in January and electricity in June
2012) altered the path of inflation in 2012. After the spike in
January to 12.6%, it fell to 11.9% in February most likely as the
combination of tightening and the budget effects of the supply
shock induced some moderation. However, the dip in headline
inflation in February was not sustained through March to July (it
averaged 12.7%). It is therefore not yet clear if the decline in

headline inflation in August to 11.69% is the beginning of a
downward trend.
9. The global outlook on growth, inflation and resolution to the
sovereign debt crisis in the EU and, the decision of the US Federal
Reserve to proceed to QE3, calls for (i) close monitoring of
financial flows into and out of the Money, Bond and Capital
markets to limit the dangers of hot money flows and (ii) caution in
projecting future inflation.
Decision
10.
I vote to hold. The decision is informed by:
a. A cautionary interpretation of the global economic and policy
outlook (growth, inflation, unemployment, sovereign debts and
policy responses in the EU and the US) as well a cautious
approach
to
inflation
forecasting
in
the
light
of
the
uncertainties and risks in the global economic environments.
b. Institutional analysis which gives greater weight to institutional
changes as the more effective means for improving cost
competitiveness and allocative efficiencies in the Nigerian
financial markets. Without such improvements, the pass through
effects of rate cuts will be limited and slow. In the meantime,
the institutional changes through the administrative tools that
are being deployed are already changing the rules of the
financial game complemented by the single treasury account
(STA) recently adopted by the fiscal authorities. As (i) the STA

expands and credit to government turns negative;(ii) FGN
Bonds matures and (iii) as the capital market is watched closely
to plug the types of loopholes encouraged unwise margin
loans; the DMBs would have to become more creative and
seek returns from lending to the real sector and other valueadding and job creating activities. I am also convinced that
creatively by-passing malfunctioning markets offer a potentially
better alternative to rate cuts now.
c. The observed progress being made towards the policy goals of
the July MPC call for staying the course: sustaining and
improving
on
implementation
of
policy
and
the
complementary
game
changing
institutional
and
administrative changes.


4.0 LEMO, TUNDE
The issue before the Committee is whether to relax the current
tightened stance or hold. Having maintained a restrictive monetary
stance since the third quarter of 2011, there are arguments that the
real sector is being penalized with high interest thus constraining real
output growth. As convincing as this argument may sound, there is a
need to guide against knee-jerk reaction as more time is needed to
monitor the full impact of the earlier policy actions.

The inflation level, though recorded appreciable moderation
between July and August, is still not in a comfortable zone
particularly with core inflation currently at 14.7 per cent. Inflation
slipped into double digit region in 2008, as in most comparable
economies, consequent upon the expansionary stance of monetary
policy in response to the global financial crisis. We need to note that
most other jurisdictions have reverted to single digit. Furthermore, the
inflation outcome in August may not be as benign as we would think
in view of the masking effect of seasonality factor. The effect of
significant decline in food inflation accounted for the substantial
reduction in headline inflation. Consequently, supply shocks like
flood or drought, which are gradually becoming permanent features
of our economy, could take inflation level to a higher trajectory.
Furthermore, the outcome of fiscal operations as at July 2012
constitute a potential upside risk to inflation. Actual capital
expenditure at end-July was N293.63 billion, representing about 22
per cent implementation. With the recent pressure on the executive
by the National Assembly, it is expected that a significant proportion
of the outstanding balance would be spent in the remaining period
of the year. Such a huge injection within a space of about three
months is expected to put additional pressure on price level.
It is equally expedient that we consider the conventional savingsinvestment argument. The average consolidated deposit rate at 3.48
per cent in August 2012 reflects high negative real interest rate. This

could only fuel consumption with adverse implication for future
investment and employment. The economy cannot perpetually
depend
on
foreign
capital
for
domestic
investment
when
consideration is given to the risk of reverse flow during periods of
shocks. One of the best means to sustainable capital formation for
investment is domestic resource mobilization.
Finally, significant dark cloud still exists in the global economy as most
developed and emerging economies have revised downward their
growth projections for 2012. The priority of monetary policy at this
period should include protecting the economy from uncertainty by
building external reserve buffer. The prevailing tightening stance
most especially the recent upward adjustment to the CRR and
reduction in the NOP have considerably helped in not only
managing the demand side of the foreign exchange market, it has
also boosted the supply end through improvement in remittances.
In the light of foregoing, I propose that the current tightening stance
of monetary policy should be maintained by holding both MPR and
CRR at 12 per cent.


5.0 MOGHALU, KINGSLEY CHIEDU
Unlike the situation at the meeting of the Monetary Policy
Committee in July 2012, we are faced with one today in which the
decision the MPC should take appears obvious. With headline

inflation having declined to 11.7 per cent in August 2012 from 12.8
per cent in July, and food inflation having declined markedly from
12.1 per cent in July 2012 to 9.9 per cent in August, and considering
the MPC’s decision in July to raise the Cash Reserve Ratio to 12 per
cent and reduce banks’ Net Open Position to 1 per cent, there is no
real impetus to increase the MPR at this time.
This is all the more so considering that the decisions of the July 2012
MPC have contributed significantly to reduced inflation rates, the full
impact of those decisions may not yet have fully passed through into
the economy, and staff projections of inflation for the rest of the year
are trending downward. Gross Domestic Product growth rate at 6.28
per cent in Quarter 2 of 2012, is lower than the 7.61 per cent
recorded in the corresponding period in 2011. In these
circumstances, further raising the MPR or the CRR at this point could
contribute to instability in the economy.
But there is no compelling argument to reduce rates either.
Although core inflation figures were lower in August 2012 at 14.7 per
cent, down from 15 per cent in July 2012, those figures remain high
enough for the MPC to maintain a cautious stance at this point.
There are several other arguments for maintaining the MPR, the CRR,
and the NOP at their present levels. The impact of the quantitative
easing policy (QE3) of the United States Federal Reserve Bank, which
will herald another round of money creation and bond purchases in
order to stimulate growth in the U.S economy, will lead to increased

inflows of U.S dollars into frontier markets such as Nigeria in search of
higher investment yields. This development will likely be positive for
the stability of the exchange rate of the naira and for Nigeria’s
foreign reserves, but it could create bubbles and must be monitored
closely.
Foreign reserves have recently crossed the $40 billion mark, but the
need remains high to build Nigeria’s buffers for the rainy day. We
have not arrived at a time or situation when the MPC can logically
contemplate reducing monetary rates. We are now in positive real
interest territory relative to inflation, and it remains necessary to
promote domestic savings and reduce the gap between low
deposit and high lending rates. While I agree that reducing the
overhead costs of banks is an important path to reducing this
disparity, it is my view, especially given the clearly exploitative levels
of charges imposed on bank customers, that more should be done
by banks to review their risk-based pricing models to reduce the
wide gap between deposit and lending rates. The failure to narrow
this gap remains one of the challenges of monetary policy
transmission and banking regulation considering the prevailing MPR
of 12 per cent.
The argument for reducing monetary rates in order to improve
access to credit is constrained by a number of factors. The
discussion needs to be taken beyond access to credit because the
evidence that access to productive credit would improve

significantly if rates are reduced is not compelling – if the experience
we have had with the wide divergence between deposit and
lending rates despite higher interest rates is anything to go by.
There are structural factors other than the MPR or CRR that would
ease access to credit but are as yet not in place. These include the
need to reduce the dominance of commercial banks in the nation’s
financial sector, with banks providing over 90 per cent of credit.
Without effective competition in financial intermediation, banks
have a monopolistic position and a captive market in which they
inevitably weigh the creation of credit (in a system in which they can
increase their profits through other means such as investing in
Federal Government of Nigeria Treasury Bills) against other factors
such as credit risk and returns to shareholders. All of this in an
economy that has been liberalized and in which state-directed
lending to preferred sectors of the economy in past years did not
deliver the desired results. Other factors affecting credit creation
include the absorptive capacity of the real sector in the face of
weak electric power infrastructure. Fundamental structural reforms
need to become evident in order to create a pull factor for
increased bank lending to the real economy.
For all these reasons, including anticipated fiscal injections in Q4 of
2012, the MPC will have to maintain a tight monetary policy stance
in the near to medium term. It is also important to avoid policy
summersaults in the management of monetary policy, especially as

the evidence of the efficiency of the MPC’s policy measures has
been steadily on the increase.
Against the foregoing background, I vote to:
(i)
Maintain the MPR at 12 per cent with the prevailing
corridor of plus or minus 2 per cent;
(ii)
Maintain the CRR at 12 per cent;
(iii)
Maintain the NOP limit for banks at 1 per cent of
shareholders’ funds.

6.0 OLOFIN, SAM
At our last meeting we took the bold step of introducing further
tightening measures against market expectations, as part of our
proactive measures to protect the economy against any possible
major external shocks. Judging by the preliminary evaluations of the
impact of these measures in our staff report, they appear to be
yielding the desired results. Crucially, there has been a significant
boost to the rate of accretion to foreign reserves, and headline
inflation in conformity with model forecasts earlier in the year appear
to be trending downwards. While it may be too early to draw major
conclusions from these outcomes, there is no doubt that by biting
the bullet as it were at the last meeting, we may have succeeded in
sending a very strong signal of disapproving, (in the face of current

challenges), the continued channeling of excess liquidity into
speculative demand at the foreign exchange market window to run
down reserves and weaken the Naira. It has been reasonably
established that what we need is to stabilize the markets and build
up reserves. This however leaves little or no room for complacency
for as long as structural constraints hamper growth in the real sector.
There is also the continued challenge of achieving in the medium
term, the diversification of the economy from dependence on a
single major export commodity and undue reliance on imports.
Global economic recovery remains fragile, with further accentuation
of the downside risks associated with slowing down of U.S. output
growth from 2.5% in Q2 2011 to 1.7% in Q2 2012, and less than
expected contribution from private sector inventory investments. In
the Euro area, real GDP growth is estimated to slow down from 1.5%
in 2011 to -0.3 in 2012. Similarly, China’s real GDP growth rate is
shown to have gone down from 8.1% in Q1 2012 to 7.6% in Q2, 2012,
due mainly to decline in net exports. What appears to have been a
positive development in the U.S. economy since we last met, that
has potential beneficial effects on the domestic economy is not
without its major downside risks. This is the possibility of having large
portfolio capital inflows that may result from the Fed’s QE3. As
desirable as this might be, its downside risk of reverse flow of hot
money in response to the slightest domestic or exogenous
disturbances, limits the extent to which this may be seen as a positive

development. Consequently the country is still likely to be
confronted with the challenges that may arise from stagnating
demand for, and decline in oil prices in the medium term, the rise of
about 8.8% in spot prices in August notwithstanding. There is also the
likelihood of inflationary pressures resulting from imported food
whose prices have been estimated to have risen by 10% in July 2012.
Going back to the domestic front there is evidence of slowing but still
robust growth in output with overall GDP growth being estimated at
6.28 in Q2 2012 compared with a 3-year average (2009-2011) of
7.46%. Headline inflation has further declined to 11.70% in August
2012 compared with previous period 3-year average of 12.0%.
However core inflation still remains high at 14.70 % compared with
previous period 3 –year average of 10.97%. The Naira exchange rate
has appreciated at the wDAS by 0.04% from N157.40:1$ to N157.34:
1$ U.S as at Sep.14 2012, due to policy measures adopted at the July
2012 meeting. Most remarkably external reserves have risen from
US$32.64 as at December ending 2011, to US$42.13 as at September
12, 2012 representing an increase of approximately 30%. Even
though overall GDP has grown at a decreasing rate, and flooding
in parts of the country is likely to negatively impact on agricultural
output, there is strong evidence that improvements in electricity
supply is beginning to have positive impact on productivity and job
creation prospects. Despite anticipated increase in government

expenditure in Q4 2012 staff estimates project stable inflation rate for
the second half of the year.
In the light of the foregoing developments, the key risk factors and
policy challenges facing the economy remain essentially what they
were at the last meeting. These have to do with: (i) Euro zone crisis
and global economic slowdown, which are capable of negatively
impacting on net capital inflows and government revenue; (ii) likely
inflationary pressures from rising global food prices and unresolved
fuel subsidy issues; and (iii) continued security challenges in parts of
the country. Consequently, there may be no need for any new
major policy initiatives at this meeting different from what we were
able to put in place at the last meeting. I would therefore vote for
maintaining the status quo, while sustaining the build-up of external
reserves to insure against rising global uncertainties.

7.0 OSHILAJA, JOHN
The MPC voted today to maintain the status quo following decisions
reached mostly in prior meetings of the Committee over the past
year. Voting was unanimous; reflecting the consensual view that the
few positive turns just recently recorded, in key macroeconomic
indicators, do not yet sufficiently warrant substantive changes in the
policy stance. The Committee is not unmindful of the Public’s everpresent and understandable desire for monetary accommodation.
And we are encouraged by continuing efforts, especially at federal

levels of government, to restructure the nation’s fundamentally
unsustainable public spending profile. Nonetheless, as painful as
they have been to achieve, the modest gains evident today (on
fiscal and monetary fronts), need to be further consolidated before
easing can be realistically contemplated.

Consolidation means that inflation still needs to be decisively
wrestled down to single digit figures, so that savings and investment,
from domestic and foreign sources respectively, can sustainably
finance the rehabilitation and rebuilding of the nation’s physical
infrastructure. Under such conditions, or even reasonable prospects
of the same, we might realistically hope to see productivity gains
kicking off virtuous cycles, of secular, high-quality (i.e. job producing)
growth. But infrastructure is not the only economic factor presently
in need of rebuilding.

Consolidation also means the rebuilding of fiscal and monetary
buffers against exogenous, economic shocks; which in Nigeria’s case
(for widely-understood reasons) tends to spring from local and global
market
developments
impacting
oil
revenues,
and
foreign
exchange reserves. Let’s also try to remember that these buffers
(wisely spent, or not) were very substantially depleted by earlier
actions intended to cushion the impact, on the nation’s economy,

of the Global Financial Crisis, the ensuing Great Recession, Niger
Delta regional instabilities, and our own home-grown banking crisis.

To give an idea of the challenge of rebuilding monetary buffers, and
the levels of effort required, consider just the attrition in foreign
exchange reserves since 2007 ($30 billion). In better global
economic circumstances, this could take the CBN just a year to
rebuild– given an average accumulation rate of $2.5 billion a month.
Not an unreasonable proposition given Nigeria’s $60-65 billion import
bill and annual exports running at around $90 billion. As it happens,
recovering just a third of this historic net outflow has taken the CBN
the better part of a year. Because – in addition to responding
responsibly to factors beyond its control (e.g. capital repatriations
and portfolio liquidations by foreign investors) – foreign reserves also
had to be called upon to dampen higher pass-thru costs arising from
the Naira’s depreciation; itself the result, largely, of fiscally-induced
excess liquidity intensifying local demands for hard currency. This is
the liquidity that market operations of the Central Bank decisively set
out to reign-in this year, and the outcomes of these actions are
proving to be constructive on a number of fronts. Inflation has likely
peaked below highs forecast for this rate cycle, exchange rates
have regained reasonable stability, and borrowing costs are
prompting public and private sector managers to evaluate and
revalidate their spending and investment priorities. If the

government’s transformation agenda is to become rooted in the
business culture, this is the sort of constructive behavior that needs to
be reinforced at every opportunity – a further rationale for the vote I
also cast today.


8.0 SALAMI, ADEDOYIN
The background to this MPC meeting couldn’t possibly have offered
a greater contrast to the session in July. A marginal, 20bp, increase in
Headline inflation to 12.9percent in June provided the backward
looking context for the session in July. Concerns about the global
environment and the likely implications of emerging downside risks
coupled with worries about pressure on the exchange rate
dominated discussion. The impact of the decision to tighten
monetary policy to avoid further deterioration in cost conditions was
compounded by delayed arrival of FAAC allocations. Interest rates
rose far sharper than anticipated.

A sharp drop in the rate of price increases in August provided the
context for this meeting. All three measures of cost condition to
which we pay attention eased – Headline, Food and Core prices
rose by 11.7percent, 9.9percent and 14.7percent respectively. The
data from the National Bureau of Statistics (NBS) showed Headline,
Food and Core Consumer Price inflation to have eased from the
12.8percent, 12.1percent and 15percent reported in July. On these

numbers, inflation, contrary to expectation of increased cost
pressure, had eased and rather sharply too.

The NBS attributes the moderation in prices to be the result of
aggressive monetary policy initiatives by the Central Bank of Nigeria,
base effects and a much lower rise in several food prices such as
yams, tubers and vegetables due to the harvest season. Placed in
the context of a continuing sharp slowdown– to 3.97percent in
Q22012 compared with 4.15percent in Q12012 and 5.54percent and
5.95percent for Q1 2011 and Q2 2011 ‐, in agricultural sector output
growth, occasioned by reduced rainfall and security challenges,
slower pace of food price increase ahead, or at the beginning, of
the harvest season is a pleasant surprise.

Some will doubtless argue that lower than expected rise in prices
combined with an almost 10percent increase in accretion to
reserves and appreciation in the value of the Naira vis‐à‐vis the USD
provide a window for easing the stance of Monetary Policy. The
argument seems to be strengthened by the improving global
economic environment. The announcement of a 3rd round of
Quantitative Easing by the US Federal Reserve Bank and the
European Central Bank’s move to buy Sovereign debt ease
downside risks, at least in the short term. Confirmation of slower

output growth in Q2 2012 adds to what appears a strong case for
easing policy.

In voting to maintain the current policy stance, I am not persuaded
that the latest inflation data establishes a trend – even though I
expect food prices to ease in the rest of the year as harvests improve
supply. It is also noteworthy that Month‐on‐Month change in inflation
is higher in August for all 3 definitions. Beyond the lack of clarity as to
the trend in inflation, data in respect of the fiscal operations of
government, which shows that slightly over one‐fifth of the capital
budget has been implemented, provide a clear indication of an
impending release of the funds which will raise liquidity in the final
quarter. The anticipated injection of liquidity comes with Core
inflation already at 14.7percent and seemingly unyielding to pressure
from Monetary Policy.

The sharp spike in short term interest rates which followed the MPC
decisions in July could be the beginning of an adjustment by banks
to resolve the illiquidity occasioned by their holdings of government
securities. In other words, banks may now be forced to offer better
rates on savings and tenured deposits as they try to restore liquidity
by attracting deposits. This will also have effect of closing the
yawning gap between lending and deposit rates. It is noteworthy
that almost 48% of bank loans are at rates no higher than 15%. Of

these, slightly over a quarter of all borrowing is contracted at rates
less than 10%.

Notwithstanding the improvement in reserves, the structural fragility
of the economy suggests that easing of the Policy rate will invite
pressure on the Naira and possibly reverse the direction of capital
flows. The case for easing the Monetary Policy Rate to provide
stimulus for growth through lower cost of borrowing also remains
incomplete in the absence of reform which eases the structural
bottlenecks which cannot be affected by reducing the cost of
credit.

Finally, changing policy at this point, especially given the foregoing
may simply serve to increase volatility as economic agents react to
the new position.

I thus vote to maintain the status quo.


9.0 UCHE, CHIBUIKE
In July 2012, as a consequence of inflationary concerns, MPC by
majority decision further tightened money supply by increasing CRR
to 12 percent. Although inflationary pressures have moderated since
then, it is important to stress that in a mono-product rentier economy
like ours, an equally important reason for the above development

has been the high oil prices. While the reduction in inflation is a
welcome development, it is also right to state that thus far this
development has also had negative consequences on the
development of the real sector. The tightening of money supply has
for instance led to increased borrowing costs for businesses. This has
consequences for both the bad debt portfolio of banks and the risks
associated with the increasingly popular market for government
securities. Bluntly put, the current monetary policy stance aids the
diversion of savings that should be more productive in the real sector
to the government. Adopting market prices for securities without
doing same for savings distort development by discouraging bank
savings and encouraging the inflow of speculative FDI. Equally
troubling is the fact that it is now public knowledge that rising interest
rates have ensured that any attempt to mark government bonds to
market prices even at the present time would cause serious
problems for financial system stability.
The above unfortunate scenario is however the consequence of the
rentier structure of the Nigerian state which inherently encourages
fiscal indiscipline on the part of government. Until this structural
problem is addressed, inflationary pressures will continue to be a real
threat to the growth of the real sector. Unfortunately, trying to
control inflation in such an economy also distorts the credit market
for real sector players.

Despite the above complex and difficult circumstances, I am of the
view that there is still some room for regulatory maneuver in order to
ameliorate the credit environment for the real sector. One obvious
problem that should be addressed is the increasing margin between
the deposit rates and lending rates offered by Nigerian banks. As I
stated in my last MPC decision statement, it is troubling that rising
interest rates have only led to increased margins between deposit
and lending rates. This is no doubt the classic scenario in an
oligopolistic market where collusion thrives. A margin of almost 20
percent between savings and borrowing rates 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 in any economy. We therefore
need to consider putting in place some kind of controls on the
intermediation margins of Nigerian 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 the light of the above analysis and in the interest of avoiding
regular policy summersaults, I am willing on this occasion to vote for
the maintenance of the status quo. I therefore vote 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.

If current oil prices continue to be favourable, I am hopeful that by
the next MPC meeting, the conditions would be right for a gradual
reduction in MPR. This will no doubt help promote real sector
development which incidentally is a necessary condition for Nigeria
to break out of its current vicious cycle of overdependence on oil
rents and the attendant consequences.


10.0 SANUSI, LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the
Monetary Policy Committee
A key feature of the decision making of the MPC in the last 2 to 3
years remains our ability to anticipate developments and courage
to act in advance of crystallization of anticipated risks. The last MPC
meeting was held in a global environment characterized by slow
growth (and even recession in some cases) in the United States,
Europe, and major Emerging Market economies like China, India
and Brazil.

The currency markets were in turmoil and the Naira was under
pressure leading to a breach of our target band and posing a risk to
reserves. The economy at this time needs to build up reserve buffers
in order to withstand the spillover effects of the slowdown in
commodity prices and portfolio flows.

The MPC therefore decided to act and send a clear signal of its
commitment to price and exchange rate stability and the protection
of this stability partly through minimizing attrition of foreign reserves.
We expressed concern at the slow pace of structural reforms,
particularly in the power sector, as well as fiscal leakages including
illegal bunkering of crude oil in the Niger Delta and suspicious subsidy
payments to oil marketers which were constituting a drain on
reserves. The decision to increase CRR to 12% was a first step
towards moving to structurally tight monetary condition conducive
to
long-term
price
stability.

This
was
complemented
by
administrative changes aimed at reducing foreign exchange
balances held for speculative purposes (reduction in the Open
Position Limit and the holding period of purchased funds), as well as
bringing to an end the tendency to finance interbank placements
and foreign exchange bids from funds borrowed at the CBN
window.
We effectively reversed the remaining
measures
introduced during the banking crisis as part of our accommodative
stance of 2008 – 2010.

Although the global environment, in my view, has not significantly
improved, it is a fact that it has also not significantly deteriorated.
Furthermore, Central Banks on both sides of the Atlantic have taken
a decisively more accommodative stance. The United States
Federal Reserve has moved beyond “Operation Twist” on to QE3.

Chairman Bernanke clearly believes that QE has contributed
significantly to United States growth and employment, although the
transmission channel does not seem to have been clearly identified.
It is also an open question if the “bounce” in stock and real estate is
really an indicator of sustainable GDP growth or a short-term
palliative that marks the beginning of a new boom-bust cycle. In
Europe, Governor Draghi has announced a new package for
increasing ECB purchases of Sovereign Bonds of distressed countries
to moderate yields, subject to firm commitment to a fiscal compact.

The actions of the Fed and ECB have brought to fore once more the
debate on the limits of monetary policy and if central bankers in
Europe and United States are not providing short-term relief instead
of allowing Governments to implement the difficult fiscal and
structural policies required for sustainable growth and employment.
Irrespective of the merits of the arguments on both sides, it is evident
that these policies will lead to increased capital flows to frontier and
emerging markets. In the short-term, there is good news for the
exchange rate and borrowing costs, as well as inflation, but it comes
with the risk of volatility, and the flows must thus be strictly monitored.

My reading is that we achieved all the limited objectives we set for
ourselves at the last meeting. The exchange rate has stabilized

(even strengthened), the reserve position has improved and inflation
came down first to 12.8% in July and then 11.7% in August.
While welcoming the decline in inflation rate it is important to note
the following:

1. Core inflation remains stubbornly high at 14.7%.
2. Decline in inflation in food and non-alcoholic beverages
accounted for 51.8% of the decline in headline inflation in
August.
3. Food inflation declined very steeply from 12.09% in July to 9.91%
in August. This may have been due to a combination of a base
effect, budget-line import of new tariffs and subsidy-removal,
and tight monetary conditions.
4. Imported food inflation declined by 231 basis points from
18.01% in July to 15.7% in August. This is counter-intuitive given
global trends and increased tariffs, especially as sharp declines
in the index for rice and wheat (where new tariffs kicked-in in
July) contributed to the result.

After reviewing the unchanged global environment, the balanced
risks posted by QE3 and monetary easing by the ECB, the tentative
recovery of the capital market and the mixed signals contained in
the inflation numbers my vote is to hold our current position and

watch developments in output, prices and the global economy as
we approach year end.

I therefore vote for retaining:

1. MPR at 12% +/- 2%
2. CRR at 12% and
3. NOP at 1%