Nigeria Holds Key Rate, Cuts Cash Reserve Ratio to 25%

The central bank of Nigeria left its benchmark interest rate steady at 13 percent at its September 22nd, 2015 meeting. However, policymakers cut bank's cash reserve ratio to 25 percent from 31 percent, aiming to increase liquidity.
Central Bank of Nigeria | Joana Taborda | 9/22/2015 4:48:25 PM
Liquidity on the interbank market decreased after the government implemented the Treasury Single Account (TSA) scheme last week, under which all revenue due to the Federal Government is moved to a single account, leading to liquidity withdrawals from commercial banks. 

The decision to hold the key rate steady at a record-high was in line with market expectations amid inflationary pressures. Yet, annual inflation rate hit 9.3 percent in August, remaining above the central bank’s 6 percent to 9 percent target range for the third month in a row. 

Excerpts from the Statement by the Central Bank of Nigeria:

The Committee noted that the overall macroeconomic environment remained fragile. The economy further slowed in the second quarter of the year, making it the second consecutive quarterly less-thanexpected performance. The Committee noted that growth had come under severe strains arising from declining private and public expenditures. In particular, it noted the impact of non-payment of salaries at the state and local government levels as a key dampening factor on consumer demand. Year-on-year headline inflation continued to trend upwards, although the month-on-month measure moderated. Demand pressure in the foreign exchange market remained significant as oil prices continued to decline. Arising from these developments, there were indications that some of the banking sector performance indicators could be stressed if conditions worsen further. Specifically, the Committee noted that liquidity withdrawals following the implementation of the TSA, elongation of the tenure of state government loans as well as loans to the oil and gas sectors could aggravate liquidity conditions in banks and impair their financial intermediation role, thus affecting economic growth, unless some actions were immediately taken to ease liquidity conditions in the markets. Having seen two consecutive quarters of slow growth, the Committee recognized that the economy could slip into recession in 2016 if proactive steps were not taken to revive growth in key sectors of the economy.

In the face of prevailing circumstances, the Committee acknowledged that synergy between monetary and fiscal policies remained the most potent option to sustainable growth. The Committee further observed that the impact of the persistent decline in global crude oil prices on the fiscal position of Government continues to reflect in rising credit to government. The Committee also noted that the initial market reaction to the decision by JP Morgan to exclude the country from its Government Bond Index for Emerging Economies (GBI-EM) had largely dissipated as yields soon adjusted to their pre-announcement levels’ adding that there may be second round effects over the next two months as the economy adjusts to that decision. The Committee reiterated its unwavering commitment to naira exchange rate stability despite the pressures. Mindful of the possibility of diversion of any extra liquidity to the foreign exchange market, the Committee urged the Bank to closely monitor the nature and sources of demand pressure in the foreign exchange market to ensure that funds were not diverted to demand for foreign exchange but applied to specific growth enhancing asset creation lending by banks. It further noted that sectors such as agriculture and MSMEs were sectors for rapid generation of productive employment and wealth creation, and must therefore, be painstakingly encouraged. 

Nigeria Holds Key Rate, Cuts Cash Reserve Ratio to 25%