Central Bank of Nigeria Communiqué No. 95 of the Monetary Policy Committee
Meeting of May 19 and 20, 2014

The Monetary Policy Committee (MPC) met on 19th and 20th May, 2014 against the
backdrop of continuing modest recovery in the US economy, lingering fragile
recovery in Europe, slowing output growth in the emerging market economies and
possible risks to domestic price stability. In attendance were 9 members including
Mr. Adebayo Adelabu, the new Deputy Governor, Financial System Stability. The
Committee considered major developments in both the global and domestic
economies up to May 2014, and the outlook for the rest of the year.

International Economic Developments
The Committee noted the prospects of improved global growth in 2014 predicated
on expectations of sustained favorable developments in the US and the euro area.
Driven by the recovery in the advanced economies, global growth strengthened
in the second half of 2013, averaging 3.6 per cent from the 2.6 per cent recorded
during the first half. In the United States, improved domestic demand continues to
strengthen growth outlook. In Europe, a pickup in growth in the core states
continued to compensate for the decline in most of the peripheral states even as
debt, low inflation, financial fragmentation and unemployment persisted as threats
to sustainable long term economic recovery in the region. Growth in the emerging
markets and developing economies is projected to rise from 4.7 per cent in 2013 to
4.9 per cent in 2014. The effects of tighter financial conditions in these economies
are expected to be moderated by improved external demand from the
advanced economies.

Global inflation is generally expected to remain subdued in 2014 with sustained
sizable negative output gaps in the advanced economies, weaker domestic
demand in several emerging economies, and falling commodity prices. In the euro
area and the United States, headline inflation at about 1.5 per cent is projected to
remain below the long-term inflation expectations. Lower world commodity prices
in U.S. dollar terms would help reduce price pressures, although in some
economies, exchange rate depreciation continues to pose a threat to consumer
price stability.

The Committee noted that monetary policy stance across the advanced
economies could begin to diverge in 2014/15. In the United States, the Federal
Open Market Committee (FOMC) rate is expected to increase, post-tapering, in
2015. On the contrary, markets continue to expect a prolonged period of low
interest rates and supportive monetary policy in the euro area and Japan. In the
emerging market economies, there has been a tightening of monetary and
financial conditions since mid-2013, owing to the combined effect of spillovers
from rising bond rates and better economic prospects in the advanced
economies based on the markets’ reassessment of medium-term growth
prospects. The risks posed to the emerging economies by capital reversals in the
post-tapering era remain a major challenge to the outlook.

Overall, global economic outlook remains benign with prospects of steady and
gradual improvements in the major economies, as well as slowing but sustained
healthy growth in the emerging markets and developing economies.

Domestic Economic and Financial Developments
Output
The Committee noted that real Gross Domestic Product (GDP) growth remains
robust. The recently rebased GDP figures released by the National Bureau of
Statistics (NBS) indicated that real GDP grew by 7.41 per cent in 2013, compared
with the 5.09 and 6.66 per cent recorded in 2011 and 2012, respectively. From the

rebased GDP, the new major sectors of the economy in 2013 in terms of their share
in GDP were: Services (36.08%); Industry (21.73%); Agriculture (21.50%) and Trade
(17.06%). Figures for the first quarter of 2014 based on the rebased GDP are yet to
be released by the NBS. The non-oil sector remained the main source of overall
growth performance (7.77%), driven largely by: agriculture (0.43%), industry (1.28%)
of which manufacturing was 1.26% and construction (0.62%); trade (1.54%) and
services (3.89%).
Prices
Inflation has remained within the indicative benchmark target range of 6.0-9.0 per
cent during the first four months of 2014. On a year-on-year basis, however,
headline inflation inched up to 7.9 per cent in April from 7.8 per cent in March
2014. Food inflation, which was 9.3 per cent in January, declined to 9.2 per cent in
February and slightly increased to 9.3 and 9.4 per cent in March and April, 2014,
respectively. Core inflation, which declined to 6.6 per cent in January, increased to
7.2 per cent in February, and rose further to 7.5 per cent in April, 2014. The
Committee noted that headline inflation has remained within single digit in the last
sixteen months and stressed its commitment to sustain price stability; defined by
the Bank’s indicative benchmark range.

Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) increased by 1.94 per cent in April, over the level at endDecember 2013. When annualized, M2 increased by 5.83 per cent. M2 was
however, below the growth benchmark of 15.52 per cent for 2014. The increase in
money supply reflected the growth in the net domestic credit (NDC) of 1.62 per
cent in April. Annualized, NDC grew by 4.85 per cent over the end-December,
2013 level. It is, however, below the provisional benchmark of 28.5 per cent for
2014. The slow growth in aggregate credit was traced mainly to Federal
Government borrowing which contracted by 18.06 per cent in April 2014 or 54.18
per cent on annualized basis. In the period under review, money market interest
rates remained within the MPR corridor of +/- 200 basis points; oscillating in tandem
with the level of liquidity in the banking system. The inter-bank call and OBB rates

averaged 10.5 and 10.59 per cent, respectively, in April. As at mid-May, the interbank call rate stood at 10.57 per cent while the OBB rate was 10.32 per cent.

The Committee noted the modest improvement in the equities segment of the
capital market in the review period. The All-Share Index (ASI) rose by 0.7 per cent
from 38,748.01 on March 31, 2014 to 39,018.34 on May 16. Similarly, Market
Capitalization (MC) increased by 3.3 per cent from N12.45 trillion to N12.85 trillion in
the same period. However, relative to end-December 2013, the indices declined
by 5.6 and 2.8 per cent, respectively. This was traced partly to the impact of the
response of global financial markets to Q.E. tapering by the US Fed, weak
economic performance in the emerging markets and fragile recovery in the
Eurozone.

External Sector Developments
The naira exchange rate remained stable at the rDAS window but appreciated at
the interbank and the BDC segments of the market. The exchange rate at the
rDAS-SPT during the review period (March 26,-May 16, 2014) strengthened to
N157.29/US$ from N157.30/US$, representing an appreciation of N0.01k or 0.01 per
cent. At the Interbank foreign exchange market, the selling rate opened at
N164.65/US$ and closed at N162.33/US$, representing an appreciation of 1.41 per
cent or N2.32k in the same period. At the BDC segment of the foreign exchange
market, the naira which sold at N172.00/US$ on March 26, closed at N167.00/US$
on May 16; indicating an appreciation of 2.91 per cent.

Gross official reserves as at May 15, 2014 stood at US$38.30 billion compared with
US$37.40 billion at end-March and US$42.85 billion at end-December 2013. The
current level of the country’s external reserves could provide approximately 9
months of imports cover.

The Committee’s Considerations
The MPC noted the mixed signals over the global growth prospects in the
advanced, emerging markets and developing economies. From the United States,

the continued gains in employment, rising inflation and growth stability could soon
pave way for policy tightening. On the contrary, the outlook for monetary policy
appears biased towards sustaining easy monetary stance in the euro area and
Japan against the backdrop of slow and uneven recovery in the region. For the
emerging markets and developing countries, the Committee was concerned that
the current underlying pressures on their currencies arising from capital flow
reversals, increases in consumer prices and declining inflows, which preclude the
use of expansionary monetary policy to stabilize domestic output and employment
in the short run, could dampen growth prospects.
The Committee noted with satisfaction Nigeria’s overall domestic economic
environment which has remained stable with inflation contained within the target
range, the recent stability in the foreign exchange market, stable interbank rates
and strong growth outlook. The key challenge for policy, in the Committee’s view,
was that of sustaining and deepening the outcomes of existing policies. It noted,
also, that over the medium term, the major risks to price stability appeared to be
emanating from both external and internal sources.
From the external environment, risks to the domestic economy include the
prospects for increased yields and interest rates in the US and the rather low level
of economic activity in the emerging markets; both of which could have
repercussions for foreign exchange inflows (private and official) and stability of the
naira exchange rate. Internally, the key risk factors include the high systemic
banking system liquidity, elevated security concerns and anticipated high
election-related spending in the run-up to the 2015 general elections. High
domestic liquidity could exert sustained pressure on both the exchange rate and
consumer prices, as well as accentuate the already high demand for foreign
exchange, further depleting the country’s external reserves. In addition, core
inflation has continued to send conflicting signals since January 2014. If the upward
trend continues as observed in April 2014, it could be a major factor in the upward
trend in prices.

The Committee also expressed concern over the eroded fiscal buffers which have
exposed the economy to vulnerabilities arising from both domestic and external
shocks. The erosion has accentuated the regime of persistently high interest rates,
elevated demand for foreign exchange and declining reserves accretion. The
Committee enjoined the Management of the Bank to continue to monitor
developments in the fiscal space with a view to taking appropriate monetary
policy actions.

In the light of the foregoing, the Committee acknowledged the success of
monetary policy measures in attaining price and exchange rate stability and
considered: the potential headwinds in 2014, the ultimate goal of transiting to a
truly low-inflation environment; and the need to retain portfolio flows. The
Committee unanimously voted to retain the current stance of monetary policy. In
addition, one member voted for an asymmetric corridor around the MPR.

Consequently, the Committee voted to:

hold the MPR at 12%;

keep the CRR on public sector deposits at 75% and CRR on private sector
deposits at 15%;

retain the MPR corridor at +/-200 basis points.

Thank you


Sarah O. Alade
Acting Governor
Central Bank of Nigeria
20th May, 2014