CENTRAL BANK OF NIGERIA’S COMMUNIQUE NO. 57 OF THE
MONETARY POLICY COMMITTEE, AUGUST 5, 2008

The Monetary Policy Committee (MPC) met today August 5, 2008 and reviewed
extensively the major macroeconomic developments in the domestic and global
economy during the first seven months of 2008. In addition, it assessed the
outlook for the rest of the year. The MPC noted that key domestic macroeconomic
outcomes were mixed. The international financial markets deteriorated further
while there was a marked slowdown in global economic activities and acceleration
in inflation. The US dollar continued to fall against major currencies while the
international crude oil prices remained high in the first seven months of 2008.
Specifically, on the domestic scene, inflation pressures have mounted and most
key interest rates maintained an upward trend. The naira exchange rate, however,
remained fairly stable. There has been strong liquidity upsurge mainly due to rise
in fiscal expenditures. Overall, the outlook for the rest of the year remains
uncertain. These concerns posed serious challenges to the Committee in its
consideration of the appropriate monetary policy actions to be taken.

The Committee recognized that the current rate of inflation year–on-year requires
urgent attention because of the adverse effects of inflation on the economic well
being of the citizens. Aggregate demand has been at very high levels due to large
public as well as private expenditures. Domestic liquidity management as a result
has posed a major challenge. The MPC, therefore, restated its commitment to
price stability through the pursuit of appropriate monetary policy to rein in the
emerging inflationary pressures.


KEY MACROECONOMIC DEVELOPMENTS
Inflation
The Committee noted the sharp rise in the year-on-year inflation rate of 12.0 per
cent compared with 7.8, 8.2 and 9.7 per cent recorded in March, April and May
2008, respectively. The increase in the inflation rate was traceable to the sharp rise
in the prices of food and fuel, particularly diesel. Food inflation on a year-on-year
basis was 18.1 per cent in June as against 14.7 per cent in May. Although, the
outlook for inflation based on current trajectory raised serious policy concerns for
the MPC, the Committee noted that moderation in inflation could be expected by
the end of the year if the projected good agricultural performance and rice import
intervention scheme are sustained, coupled with a credible slowdown of both
public and private expenditures.

Output
Aggregate output measured by real gross domestic product (GDP) at 1990
constant basic prices, according to the National Bureau of Statistics (NBS) was
estimated to have grown by 6.65 per cent in the second quarter of 2008, compared
with the provisional growth rate of 5.54 per cent in the first quarter of 2008 and
5.43 per cent in the second quarter of 2007. The growth in the second quarter of
2008 was largely driven by the non-oil sector, which grew by 8.82 per cent. The
NBS projects a favourable outlook for output in 2008 on the assumption of
projected strong growth in the non-oil sectors, particularly agriculture and
services.

Money and Credit
Provisional data show that broad money (M2) growth over the end-December
2007 level continued to be excessive at 37.7, 34.3, 29.9 and 37.4 per cent in
March, April, May and June 2008, respectively. The growth in M2 was driven

largely by the growth in credit to the core private sector, complemented by growth
in net foreign assets. The threat of sustained rapid growth in money and credit
aggregates for the remainder of the year remains strong against the backdrop of
the prospect of further liquidity injections during the third and fourth quarters as
governments intensify efforts to fully implement their annual budgets by the end
of the year and as preparations are made for the end of year festivities.

External Sector Developments
The MPC noted with satisfaction the continued increase in international reserves.
The gross external reserves amounted to US$60.31 billion as at July 31, 2008
representing an increase of US$8.98 billion over the level in December 2007. The
level of external reserves is likely to remain high in the remainder of the year
partly owing to the expectations that oil prices would remain at elevated levels and
partly to private capital inflows.

The MPC noted that the exchange rate of the naira has generally been stable. The
staff assessment is that there would be continued orderliness in the foreign
exchange market in the remaining months of the year.

Interest Rates
The MPC noted the upward movement of most key interest rates in response to the
prevailing market conditions. The average inter-bank call rate edged up by about
0.2 percentage point to 10.40 per cent in June, 2008. It rose to 13.95 per cent at
end July 2008. Rates on time deposits of various maturities as well as the
maximum lending rate also rose.

Fiscal Operations
The Committee noted that the total federally-collected revenue for the first half of
2008 was about 21.71 per cent higher than the proportionate budget estimate for
the period. The MPC noted with concern the huge liquidity injection from the
fiscal arm which emanated from the sharing of part of the excess crude proceeds
and the enhanced regular Federation account allocations. It noted the negative
impact these have had on overall liquidity and the threat posed to macroeconomic
stability from other disbursements scheduled for the remaining part of 2008. The
MPC also noted that moderating the impact of fiscal operations on liquidity
through innovative mechanisms involving monetization would be worthwhile for
ensuring that macroeconomic stability is maintained.

The Outlook and Policy Considerations
The MPC noted that in the short term, the expected good harvest of agricultural
products and the implementation of the rice import intervention scheme by the
Federal Government are likely to exert a downward pressure on food prices and,
hence, headline inflation. This notwithstanding, current projections indicate that
inflation rate may remain in the double-digit zone, if the current trajectory is
maintained till the end of the year. The Committee expects that, the sustenance of
a restrictive monetary policy stance to counter balance the excessive expansionary
fiscal stance, anchored on a more intense liquidity mop-up operations, could
deliver a lower headline inflation outcome by the end of the year than current
forecasts suggest.

Decisions
The Committee decided as follows:
1. The MPR will remain unchanged at 10.25 per cent since the core inflation
is expected to remain at a relatively moderate level.

2. After reviewing developments in the financial market and the misplaced
perceptions that the interest rate trends are linked to the requirement of a
common year-end, the MPC decided that the common year-end for banks
would no longer be a requirement and therefore left the decision to the
discretion of the banks.
3. In order to ensure a transparent pricing regime in the money market and
thereby foster healthier competition, banks are required to fully disclose to
the public their deposit rates as well as their base lending rates and other
charges for all the sectors of the economy. These should be published on
their respective websites and updated daily. The banks are required to
report these rates to the CBN to enable the Bank to publish a summary of
the rates for each deposit money bank every month.

Professor Chukwuma C. Soludo, CFR
Governor,
Central Bank of Nigeria, Abuja

August 5, 2008