CBN MPC Communique No. 32 - February 2004
Central bank: cbn | Type: statement | Date: 2004-02-27

PRESS RELEASE
COMMUNIQUE NO. 32 OF THE MONETARY POLICY
COMMITTEE FOR JANUARY AND FEBRUARY 2004
The Central Bank of Nigeria he reby publishes a summary of the
deliberations and decisions of its Monetary Policy Committee in January and
February, 2004. This is in keeping with the Bank’s policy of transparency in
its conduct of monetary a nd financial policies. The Committee met twice
during the period, once each month.
A review of major macroeconomic indicators and financial market
developments revealed that, while si gns of a modest economic recovery
were becoming noticeable and the fina ncial markets remained generally
stable, the problem of inflation resurg ence was evident. The pressure on the
foreign exchange market, however, moderated somewhat, with the exchange
rate of the naira recording a marginal appreciation in January. Also, the
level of gross external reserves increased marginally.
In contrast to the excessive mone tary expansion that characterized
most of 2003, a sharp contraction in money supply was observed in
December, 2003 and January 2004. Sp ecifically, the broad money stock
2) declined by 5.3 and 0.2 per cent in both months, respectively as narrow
money (M1) fell substantially by 7.8 and 3. 2 per cent, respectively, during
the two months. Conversely, in January, 2003 M2 and M1 increased
substantially by 9.2 and 11.2 per cent, respectively. The main contractionary
factors of money supply during the revi ew period, were the sharp fall in
banking system credit (net) to the Fe deral Government and public sector
institutions and the decline in foreign assets (net) of the banking system.
Attributable largely to the lagged effect of the excessive growth of
money supply in 2003 and 2002, the pa ss through effect of the naira
depreciation and the hike in the pric e of fuel, the inflation resurgence
observed in September 2003 continued into December. Actual data from the
Federal Office of Statistics (FOS) indicated a further rise in the inflation rate
to 14.0 per cent (on the twelve-month m oving average basis) in December,
2003, up from 13.0 and 12.3 per cent in November and October, 2003,
respectively. On a month-on-month basi s, the annualized rate of inflation
was 23.8 per cent in December 2003, co mpared with 21.3 per cent in the
preceding month. The rise in the com posite index was influenced, largely,
by the increases in prices of food items and transportation costs.
The increased demand pressure expe rienced in the foreign exchange
market in October, 2003 continued into December. However, the pressure
moderated in January 2003 and contributed to the ma rginal appreciation of
the naira exchange rate, from N 137.53 in December, 2003 to N 136.12 per
US$1.00 in January 2004 at the Dutch Auction System (DAS) segment of
the market. Correspondingly, the na ira appreciated in the Bureaux De
Change (BDC) from N150.34 to N147.44 per US$1.00 over the same period.
The surfeit of funds in the money market influenced the continued
downward movement of inte rest rates. Available information showed that
both the deposit and lending rates of th e banks declined in January, from
their respective levels in December, 2003. Moreover, the call money rate in
the inter-bank market, recorded a s ubstantial fall, from 21.11 to 12.26 per
cent per annum over the review period.
In its overall assessment of developments in the economy, the
Committee was encouraged by the improvement, although modest, in the
growth performance of the real sector, helped by the strong agricultural
sector performance and enhanced capaci ty utilization in the manufacturing
sector. Also, the moderation of demand pressure in the foreign exchange
market seemed to have been sust ained, resulting in the continued
appreciation of the naira in all segmen ts of the foreign exchange market.
The resurgence of inflation in Sept ember, 2003 and its escalation in the
subsequent months was, however, of great concern to the Committee.
Recognising the urgent need to douse inflationary expectations and
bring the rate down, the Committee at its February 2004 meeting decided to
tighten the stance of monetary policy. Consequently, it approved a selective
withdrawal of public sector funds from the banking system, targeting a total
of N40 billion, as a strategy for reducing excess liquidity in the system. The
Committee emphasized the need for continued monitoring of
macroeconomic and financial market de velopments, with a view to taking
appropriate policy measures.
Mr. James K. A. Olekah
Secretary
Monetary Policy Committee
Abuja.
th February, 2004