It also increased bank’s Cash Reserve Ratio (CRR) to 22.5 per cent from 20 per cent, in a move aimed at tightening liquidity, which the central bank blamed for the current pressure in the foreign exchange market with a strong pass-through to consumer prices. Inflation in the country rose to 11.4 per cent last month, effectively exceeding the CBN’s inflationary ceiling by 240 basis points.
The MPR is also known as the interest rate,
The MPC also kept liquidity ratio unchanged at 30 per cent, and further resolved to narrow the asymmetric corridor around the MPR from +200 and -700 basis points to +200 and -500 basis points respectively.
MPC, however, remained silent on the fate of naira and the currency controls the central bank introduced a year ago due to dollar shortages brought on by low oil prices.
Addressing journalists at the end of the two-day meeting of the committee in Abuja, CBN governor, Mr. Godwin Emefiele, said the decision to resume the tightening regime after a four-month break, followed the evaluation of both internal and external factors, explaining that the “balance of risks is tilted against price stability”.
He said all members voted for a tightening of monetary policy, except one member who voted to retain the CRR at 20 per cent, while another member voted to retain the current width of the asymmetric corridor.
The CBN governor noted that, contrary to the notion of a liquidity overhang in the financial system, the wider economy appears to be starved of the needed liquidity to spur growth and employment.
He also said, though conflicting signals from slowing growth and rising inflation present a difficult policy challenge, the committee stressed on the need to urgently address key sources of pressure and resolved to closely monitor the development while working with the relevant authorities to address the structural bottlenecks.
He said though headline inflation shot to 11.38 per cent in February, substantially breaching the policy reference band of 6 – 9 per cent, the increase in inflation rate was largely driven by structural factors including fuel scarcity, increased electricity tariffs, persistent insecurity, exchange rate pass through and seasonality of agricultural produce, and “not so much by liquidity”.
In arriving at its policy decisions, Emefiele said: “The committee noted the weakening macroeconomic environment, reflected particularly on foreign exchange shortages, the slowing GDP growth rate and rising inflation.
“Overall economic growth slowed significantly in 2015, particularly in Q4. Apparently, the conditions responsible for the slowdown – uncertainty around fiscal policies, an adverse external environment, security challenges in some parts of the country affecting production and distribution of agricultural produce, low electricity supply, fuel shortages, and sluggish growth in credit to the private sector – have continued in the first quarter of 2016.”
On the CRR hike, he said: “From the monetary data, the committee noted that the excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market with a strong pass-through to consumer prices.
“The committee further noted that, previous efforts to reflate the economy in order to spur growth, did not elicit the required response from DMBs, hence the surfeit of liquidity in the interbank market.
“Obviously, the attendant low rates at that market have not transmitted to the term structure of interest rates. Concerned about the need for low interest rates to support growth and employment, the committee urged the CBN to explore innovative ways of ensuring the unhindered flow of credit at low cost to key growth sectors, even as monetary policy has to, under the circumstance, address the liquidity surfeit in the banking system as well as the pressure on exchange rate and consumer prices.
“The committee hopes that fiscal and other structural policies would soon be deployed to strengthen the overall response of macroeconomic policy to the shocks.”
According to Emefiele, concerns were also expressed by committee members over headline inflation, noting that the policy rate had become negative in real terms.
He said: “This development has the potential of keeping both foreign and domestic investments on hold. As part of measures to address the supply constraint in the foreign exchange market, yields on domestic instruments have to be competitive to attract the much-needed foreign inflows.
“On the administrative side, this will have to be complemented by a comprehensive reform of the foreign exchange market which is currently being undertaken.
“For the avoidance of doubt, the Bank would continue to allow domiciliary account holders unfettered access to funds in their accounts.”
The committee further enjoined the National Assembly to speed up passage of the 2016 budget in order to halt the depressing effect of the uncertainty that engulfs the waiting period.
It expressed hope that the implementation of the budget would go a long way in boosting business confidence, and reinvigorating the financial markets and urged the CBN to continue to upscale its surveillance of the financial system with the aim of promptly detecting and managing vulnerabilities to ensure sustained stability.
Emefiele also refuted suggestions that the central bank was planning to convert the over $20 billion held in domiciliary accounts in the country to naira.
He said the CBN had no intention of doing so and would never convert people’s domiciliary accounts to the naira.
Also the CBN governor said it was working to improve supply of foreign exchange for legitimate businesses, but appealed to Nigerians to look inwards to things which could be produced locally in order to reduce the pressure on foreign exchange.
He added that the refusal by banks to lend to the real sector was largely caused by the magnitude of non-performing loans (NPLs) which have almost reached the five per cent sector threshold, adding that credit advances to oil companies were largely responsible for the NPLs.
He said measures were being taken to address the huge indebtedness of the oil sector to the banking system.
