Central Bank of Nigeria Communiqué No. 65 of the
Monetary Policy Committee Meeting, September 01, 2009

The Monetary Policy Committee (MPC) met today to address the
challenges faced by the Nigerian economy against the backdrop of
recent
domestic
and
international
economic
and
financial
developments.

External Environment

The Committee noted at the outset that recessionary conditions in many
developed economies seem to be abating. However, there still exists
considerable uncertainty as to when economic recovery would set in on
a sustained basis. In recent weeks, there has been some improvement
in the price of crude oil in international markets. While this
development augurs well for Nigeria’s fiscal and external sector
positions, its sustainability would, however, depend on how quickly the
global economy would bottom out of the current recession. Inflation
rates have so far been very low in developed countries, making it
possible for central banks to maintain record low levels of interest
rates. However, unemployment rates continue to be high and the
financial system is still not adequately capitalized. Other emerging
countries too have recorded economic slowdown and relatively low
inflation. They are, however, recovering at an improved rate and their
financial and foreign exchange markets have been functioning well.

Key Domestic Developments

Output

The latest estimates of the National Bureau of Statistics (NBS) for 2008
and 2009 show a moderation in the rates of real GDP growth. The
revised growth rate for 2008 is put at 5.99 per cent as against an earlier
estimate of 6.41 per cent. For 2009, the NBS has projected growth at
5.33 per cent compared with an earlier projection of 5.75 per cent. In
the first quarter of 2009, growth was in the order of 4.50 per cent
compared with 4.64 per cent in the first quarter of 2008. In the second
quarter of 2009, however, output growth is estimated at a higher level

of 6.73 per cent compared with 5.65 per cent in the second quarter of
2008. This was largely due to the contributions of agriculture,
wholesale and retail trade and a growth in the relative contribution of
crude petroleum and natural gas production from -1.72 to 0.57
percentage point. Against this background, the Committee noted the
increased agricultural output and the expected improvement in the
output of crude petroleum and natural gas will augur well for
dampening inflation expectations.

Inflation

The Committee noted that the headline (year-on-year) inflation has
been stable at a little over 11 per cent as at July 2009. The average rates
of headline inflation and food inflation in the first seven months of
2009 were respectively 13.11 per cent (11.53 per cent in 2008) and
15.94 per cent (15.98 per cent in 2008). Given the outlook on output
and limited aggregate demand, the staff assessment is that at the end of
the year, the headline inflation would moderate further. However,
should there be any reversal in the movement of inflation, appropriate
policies would be adopted at the next MPC meeting. The main risk to
inflation comes from core inflation with higher oil prices and possible
removal of subsidies combining with the usual growth of spending
around the Christmas festive season.

Monetary Developments

Provisional data for broad money (M2) for July 2009 showed a growth
of 10.2 per cent on a year-on-year basis, the lowest for any month since
February 2006. This largely reflected the decline in net foreign assets
(NFA) and sharp deceleration in the growth of credit to private sector.
The Committee noted that recent improvements in oil output and prices
would help to improve the gross foreign exchange reserves of the
economy. However, it underscored the importance of continuing with
the efforts at improving the macroeconomic climate for attracting
foreign capital inflows and spurring growth of private credit for
productive purposes.

Interest Rates and Financial Markets

With the reduction of the Monetary Policy Rate and the introduction of
the interest rate corridor as well as Central Bank’s guarantees of
unsecured inter-bank market transactions which were firmly set,
effective July 20, there has been considerable improvement in the risk
perceptions of market participants. The spread between the unsecured
call rate and the secured open buy-back (OBB) rate has since then
come down significantly and averaged 430 basis points compared with
the average spread of 1384 basis points between July 1 and July 17 and
the average spread of 1115 basis points in June 2009. The coupon rates
on dated government securities in the primary market have tended to
move downwards.

The overnight inter bank rate was 4.11 per cent as at 28th August, 2009.
In general, this implied a massive reduction in the interbank rates since
the last MPC meeting. However, the translation of this reduction into
rates on purchased funds and lending rates seems to be delayed. Both
rates are being monitored on an on-going basis.

Exchange Rates and Foreign Exchange Reserves

The foreign exchange market has in general been relatively stable with
the re-introduction of the wholesale Dutch auction system and the
measures taken to further liberalize the inter-bank market since the last
meeting of the MPC. There has also been reduction in exchange rate
volatility. The spread between the rates at which the auctions had been
settled and the rates quoted by BDCs has narrowed from about 12 per
cent to 4.4 per cent. In the view of this, the spread would narrow further
once the confidence in the international foreign exchange markets is
fully restored with the bottoming out of the current global recession,
and more BDCs are being brought into the market.

Foreign exchange reserves as at August 28, 2009 stood at US $41.597
billion. The Committee believes that the recent improvement in the
output of oil and the price of crude oil in international markets should
help improve the external reserves position towards the end of the year.

Perspectives and the Stance of Policy

Against the backdrop of signs of gradual improvement in the external
economic environment and the positive outlook for the domestic
economy, the Committee felt that policy initiatives are needed to
further improve growth without jeopardising price and financial
stability. It will, therefore, continue to manage liquidity actively to
ensure that credit requirements are taken care of at reasonable interest
rates while monitoring the trends in prices. The Committee will also
pursue an interest rate policy that is consistent with price and financial
stability and supportive of enhancing the levels of economic activity on
a higher trajectory.

On foreign exchange, the policy stance remains that exchange rate
should be principally market driven, but interventions will be made to
mitigate tendencies towards volatility and to counteract speculative
attacks on the national currency.

Decisions

In the light of the above, the Monetary Policy Committee decided to:

a) keep the MPR unchanged at 6 per cent per annum;
b) maintain the interest rate corridor at +/- 2 per cent around the
MPR; and
c) Approve in principle the establishment of an “Asset Purchase
Facility Fund”.

The Central Bank of Nigeria and Federal Ministry of Finance to jointly
consider the modalities for setting up the APF Fund for effective
liquidity injection and credit easing targeted at specific areas of the
economy.

Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja
September 1, 2009