Nigeria Leaves Monetary Policy Unchanged

At its September meeting, Nigeria’s central bank decided to hold the benchmark interest rate at 12.0 percent, showing concerns about high banking system liquidity and its potential effects on inflation and the exchange rate.
Central Bank of Nigeria | Joana Taborda | 9/19/2014 6:05:28 PM
Excerpts from the statement by the Central Bank of Nigeria:

The MPC expressed satisfaction with the relative stability in the economy while also noting the risks that lie ahead. The key risks include: the possibility of capital reversals as the Fed’s Quantitative Easing in the US finally ends in October, amidst dwindling oil output and declining oil prices, domestic security challenges and upward trending headline inflation. The Committee further expressed concern about high banking system liquidity and its potential effects on inflation and the exchange rate. The policy challenges, the Committee noted, would include sustaining the stability of the naira exchange rate, managing the vulnerability to capital flow reversal, building fiscal buffers to insure against global shocks, managing inflation and exchange rate expectations and safeguarding the financial system stability as well as a buildup in election related spending. 

The Committee welcomed the efforts by government to address some of the constraints and risks to economic activity like the insurgency in the North-East and the Ebola Virus Disease epidemic. It noted that as progress is made in these areas and in respect of other constraints like power and improving SME financing, the outlook for growth appears bright and prospects for upward price pressure would be moderated. The Committee further noted that the restrictive stance of monetary policy provided important defenses against structural liquidity in the banking system and also reaffirmed the willingness to play a key role in managing expectations around exchange rate and inflation vulnerabilities. Consequently, adequate consideration would need to be accorded the goal of reining-in banking system liquidity to safeguard the objective of price stability. 

The Committee was, however, concerned that banks were holding large excess reserves averaging over N300 billion even when there were ample opportunities for productive and profitable lending to the real sector of the economy. The concern was further strengthened by the reality of injecting an additional N866 billion into the system through the redemption of maturing AMCON bonds in October. Given the apathy to lending, banks may be inclined more to placing these new funds in the SDF or use it to increase pressure on the exchange rate. The Committee advised the Bank to explore ways of encouraging banks to lend such excess reserves to the real sector.

In light of the foregoing and consideration of other key risk factors, the Committee was of the view that the direction for policy in the short- to medium term would be either to retain the current tight stance of monetary policy or further tighten monetary policy.

Nigeria Leaves Monetary Policy Unchanged