Excerpt from the statement by the Central Bank of Nigeria:
The Committee reviewed the conditions and challenges that confronted the domestic economy in the first quarter of 2013 against the backdrop of current international economic and financial developments with a view to reassessing the monetary policy options in the short-to-medium term.
The Committee was of the view that although the GDP growth projection remained high, there were a number of risk factors that were likely to affect output performance. These include perception of increased levels of corruption and impunity in the country, insecurity particularly in the northern part of the country, as well as mixed signals from power and petroleum sector reforms.
The Committee noted that the sharp drop in inflation in early 2013 compared with early 2012 is largely a result of the base effect of the partial removal of fuel subsidy in January 2012. With the tapering off of the first and second round effects of the increase, the prudent monetary policy stance and stable exchange rates are yielding lower headline inflation figures.
The Committee noted the upswing in activities in the capital market, as equities market indicators all trended upwards in the review period. The Committee, however, observed that the improved performance was largely induced by the substantial portfolio inflows, as foreign investors took advantage of the favourable domestic environment brought about by the high yield on government debt instruments, and stability in the naira exchange rate.
The Committee urged the Bank to continue the monitoring of portfolio and foreign direct investment flows, while being conscious of the risks to financial stability of a rapid outflow of hot money.
Having achieved a reasonable degree of moderation in the rate of inflation, there were compelling arguments to consider easing monetary policy, at least from the perspective of stimulating growth in the real sector. The Committee carefully weighed the option of relaxing monetary policy against the likely risks in the near-to-medium term, noting that reversing the current stance of monetary policy was not likely to produce a neutral outcome, as it may signal the preference for a higher inflation rate on the part of the CBN. At 9.0 and 9.5 per cent in January and February, respectively, the price data, which largely reflected the base effect of the first and second round impact of the fuel subsidy removal in January 2012, sends a clear signal that there was still an upside risk to inflation in the near-to-medium term.
In addition, the Committee observed that the foreign exchange market has started experiencing pressure in March 2013, mainly reflecting compression of yields in the fixed income market as well as outflows to pay dividends by multinational corporations. However, the Committee noted that the exchange rate has remained within the target range and also that the current monetary conditions are conducive to further tightening using Open Market Operations without recourse to an increase in the MPR.
The Committee, therefore, decided by a majority vote of 9:3 to accept option 3 and maintain the current policy stance i.e. to retain the Monetary Policy Rate at 12 per cent with a corridor of +/- 200 basis points around the midpoint; retain the Cash Reserve Requirement at 12 per cent and Liquidity Ratio at 30 per cent with the Net Open Position at 1 per cent.