The Conduct of Monetary Policy
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Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payments. However, emphasis on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms.
Conduct of Monetary Policy in 2021
In 2021, monetary policy focused on easing the impact of shocks on the Nigerian economy which emanated from the various developments in the global and domestic economies. Notable amongst these were: ongoing supply-side disruptions associated with the post-lockdown, pent-up demand; and poor acceptance and roll-out of COVID-19 vaccines even as the virus continued to mutate aggressively. In the domestic economy, the burgeoning public debt portfolio also posed a considerable challenge to the effective deployment of monetary policy as the increased accommodation by both monetary and fiscal policy to support the recovery of the global economy, could also pose some financial stability risks post-Pandemic.
As the global economy pushed ahead with the recovery, new risks emerged on the horizon associated with the early commencement of monetary policy normalization which took center stage. This risk was driven by the persistent rise in inflationary pressures across several advanced economies, driven primarily by post-Pandemic pent-up demand, supply-side constraints and rising cost of energy. Consequently, investors commenced a broad divestment from gold and emerging market securities to US dollar denominated assets as fixed income yields gradually adjusted upwards in response to the crystalized risk of monetary policy normalization. This resulted in considerable capital flow reversals from the Emerging Market and Developing Economies, leading to a new episode of exchange rate pressures and rising inflation amongst this group of economies.
Other shocks from the domestic economy resulted in broad upward pressure on prices and downward pressure on growth. Primary amongst these shocks was the heightening problem of insecurity which not only accentuated food prices as farmers were constantly unable to access their farms, but also resulted in complete destruction of entire farms in some cases. In addition to this, the economy faced considerable energy prices shocks which slowed growth further and put upward pressure on prices. The hesitant uptake and poor supply of the COVID-19 vaccine further dampened the recovery.
Data from the National Bureau of Statistics (NBS) showed that real Gross Domestic Product (GDP) grew by 0.51 per cent (year-on-year) in the first quarter of 2021, improved to 5.01 per cent in the second quarter, dropped slightly to 4.03 per cent in the third quarter and dipped further to 3.98 per cent in the 4th quarter of 2021.
In summary, inflation continued to trend above the Bank’s policy rate of 11.5 per cent following the impact of the various shocks highlighted above. Monetary policy remained broadly accommodative throughout 2021 to support the recovery. The Asymmetric Corridor was retained at +100/-700 basis points around the MPR, while the CRR and Liquidity Ratio remained at 27.5 and 30.0 per cent respectively throughout the period.
Conduct of Monetary Policy in 2020
In 2020, the thrust of the Bank’s monetary policy continued to signal an accommodative policy stance, reflecting developments in the global and domestic economic and financial environments. These developments included the protracted lockdown of economies across several regions of the world following the outbreak of COVID-19 infections and the absence of effective treatments for the virus, which continued to drag global output recovery. Other factors were persisting decline in global aggregate demand and supply; disruptions in global supply chain and trade; rising sovereign and corporate debts; heightened financial market vulnerabilities; low prices of crude oil and other commodities; and rising unemployment.
On the domestic front, the economy recorded mixed performance. The economy slipped into recession in the third quarter of 2020 following two consecutive quarters of output contraction, owing to a halt to economic activities as a result of the lockdown measures to contain the spread of the Coronavirus disease (COVID-19). Consequently, there was sustained implementation of economic stimulus by both the monetary and fiscal authorities. Data from the National Bureau of Statistics (NBS) showed that the real Gross Domestic Product (GDP) which grew by 1.87 per cent (year-on-year) in the first quarter of 2020 contracted by 6.10 and 3.62 per cent in the second and third quarters of 2020, respectively. In the fourth quarter of 2020, the economy exited recession owing to the implementation of the Economic Sustainability Plan (ESP) of the Federal Government as well as the sustained interventions in the real sector by the Central Bank of Nigeria. Accordingly, real Gross Domestic Product (GDP) grew by 0.11 per cent (year-on-year) in the fourth quarter of 2020, driven mainly by the performance of the non-oil sector, while the oil sector contracted.
On price developments, the strains on demand and supply coupled with the pressure on the exchange rate elevated the general price level as headline inflation (year-on-year) rose by 3.62 percentage points from 12.13 per cent in January to 15.75 per cent in December 2020.
The primary focus of monetary policy during the period was to strike a balance between supporting the recovery of output growth, while maintaining stable price development across inflation, exchange rate and money market interest rates. The Monetary Policy Rate (MPR) continued to be the Bank’s key instrument for signaling monetary policy stance and management. The MPR was lowered by 100 basis points from 13.5 to 12.5 per cent in May 2020, while the asymmetric corridor of +200 and -500 basis points around the MPR was maintained. In a bid to further support growth owing to the devastating impact of the COVID-19 pandemic, the MPR was further reduced by 100 basis points to 11.5 per cent in September 2020, while the asymmetric corridor was also adjusted from +200/-500 to +100/-700 basis points around the MPR.
The outlook for the domestic economy suggested a rebound in the first half of 2021 with the gradual easing of lockdowns following optimism around COVID-19 vaccine approvals and rollouts. This would be supported by continuous and synchronized monetary and fiscal stimuli, uptick in global commodity prices particularly the improvement in the global oil market, although significant downside risks remained.
Conduct of Monetary Policy in 2019
Monetary policy in 2019 was shaped by key developments in the global and domestic economic and financial environments. On the global scene, the key challenges were: rising external debt in Emerging Market and Developing Economies (EMDEs); vulnerabilities in major financial markets and tightening global financial conditions; slowdown in the Chinese economy resulting from trade war with the US; downturn in global manufacturing; US imposition of a new round of sanctions on Iran; uncertainties surrounding the BREXIT negotiations, and indications of renewed tension on the Korean Peninsula. In addition, uncertainty surrounding the continuing monetary policy normalization by the US, the European Central Bank (ECB) decision to halt its monetary policy normalization programme, and continued asset purchase by the Bank of Japan (BoJ), signaled a broad level of uncertainty in the global economy.
The weak recovery of the domestic economy since the exit from the recession continued, although with positive growth sentiments. These sentiments were due largely to stability in government following the successful conclusion of the 2019 general elections which strengthened investor confidence in the economy. The output growth was supported by improved fiscal receipts arising from increased oil production and prices; sustenance of the Bank’s development finance interventions in the real sector; as well as stability in the foreign exchange market. Accordingly, growth in real Gross Domestic Product (GDP) which stood at 2.10 per cent (year-on-year) in the first quarter of 2019, declined to 1.94 per cent in the second quarter, before rising to 2.28 and 2.55 per cent in the third and fourth quarters of 2019, respectively.
On price developments, the moderation in inflation recorded in the first half of 2019 dramatically reversed during the second half following a build-up of inflationary pressures in the domestic economy. Consequently, the headline inflation which stood at 11.37 per cent in January 2019 marginally declined to 11.22 per cent in June, then rose to 11.98 per cent in December 2019, driven by both food and core
The Bank’s monetary policy during the year was designed to stimulate growth, while maintaining inflation within a tolerable threshold. Accordingly, the Monetary Policy Committee (MPC) adjusted the monetary policy rate (MPR) downwards by 50 basis points to 13.5 per cent in March 2019. This was to signal a pro-growth stance by way of encouraging the flow of credit to the productive sectors of the economy. The MPR was retained at 13. 5 per cent along with asymmetric corridor of +200 and -500 basis points around the MPR for the remaining part of the year.
Growth remained a challenge in the review period. Output recovery continued at a moderate pace, with the outlook indicating continued improvement into 2020.
Conduct of Monetary Policy in 2018
Monetary policy in 2018 continued to be shaped by developments in the global and domestic economic and financial environment. At the global level, the key influences were: increased monetary policy divergence among the advanced economies; continued uncertainties surrounding the BREXIT negotiations and sustained monetary policy normalization in the US as the Fed hiked its interest rate and gave forward guidance of more, with implications for capital reversals from the emerging markets and developing economies. Others included the U.S withdrawal from the Iranian nuclear deal, the emerging trade tensions between the US and other major world economies as well as pockets of geopolitical tensions. These, notwithstanding, the global economy continued on the path of recovery, stemming from the strengthening of domestic investment demand and relatively easier financing conditions in the advanced economies, as well as the sustained recovery in oil and other commodity prices, amid limited spillovers of trade tensions to market sentiments.
In the domestic economy the promising developments during the period were: improved fiscal receipts and accretion to reserves as a result of sustained recovery in oil and other commodity prices, improved oil production, improvement in the 2017 capital budget implementation which was extended into the first half of 2018, sustained development finance interventions in the real sector by the Central Bank of Nigeria, and continued implementation of Economic Recovery and Growth Plan (ERGP). The outcome was reflected in improving but still fragile economic recovery during the year. Consequently, Gross Domestic Product (GDP) growth moderated to 1.95, 1.50 and 1.81 per cent (year-on-year) in the first, second and third quarters of 2018 from 2.11 per cent in the fourth quarter of 2017.
On price developments, the Bank noted that the continuing liquidity surfeit in the banking system, notwithstanding, inflationary pressure moderated in the review period as headline inflation declined progressively from 15.13 per cent in January to 11.44 per cent in December 2018. The development largely reflected the relative stability in the foreign exchange market, improvements in food supply, and stability in utility prices.
Monetary policy in the review period, was informed by key considerations which included; the slow output recovery; high but moderating inflation rate which remained above the Bank’s target range; continuing liquidity surfeit in the banking system; weak macro-prudential indicators; growing sovereign debt and low fiscal buffers. These developments and the need to achieve the Bank’s mandate of price and exchange rate stability provided the basis for the sustenance of the tight monetary policy stance during the year. Consequently, the Bank kept the Monetary Policy Rate (MPR) at 14.0 per cent and retained its standing facility corridor at +200/-500 basis points. The Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) were also held constant throughout the review period at 22.5 and 30 per cent, respectively. The Bank also continued its reliance on Open Market Operations as main tool for liquidity management, complemented with regular foreign exchange interventions. Although the Nigerian capital market opened on a bullish note in the review period, the market witnessed a significant decline towards the end of the period, on account of a weak corporate environment and sustained capital reversals in response to on-going monetary policy normalization in some advanced economies. Consequently, the All Share Index (ASI) only recorded a marginal increase of 17.81 per cent from 38,243.19 at end-December 2017 to 31,430.19 at end-December 2018.
The broad outlook for the domestic economy in 2019 portends a positive outlook for the domestic economy. Output growth is expected to be driven by fiscal stimulus from increase in oil and non-oil receipts to support the Federal Government’s Economic Recovery and Growth Plan. The economy is projected to grow by 2.0 per cent by the IMF, 2.2 per cent by the World Bank and 2.28 per cent by the CBN. Key headwinds to these forecasts, however, are softening oil prices, persistent security challenges arising from insurgency in the North East and herdsmen/farmers clashes in some parts of the country and perceived political risks associated with the 2019 general elections. The outlook for inflation in the first half of 2019 is mixed, with the expectation of an increase in the near-term before a gradual decline towards the mid-year. Outlook for the global economy remains uncertain due to the effect of on-going trade tensions between the US and its key allies, slower growth in China, unclear direction of BREXIT negotiations and continuing monetary policy normalization in some advanced economies.
Conduct of Monetary Policy in 2017
During the first half of 2017, the focus of monetary policy was shaped by developments in the global and domestic economic environments. The key challenges to monetary policy-formulation on the global front were: the rising wave of protectionist sentiments in major advanced and emerging market economies, increasing monetary policy divergence in the advanced economies, and resumption of monetary policy normalization in the US with its spillover effects on global capital flows. In addition, commodity price movements remained disorderly, with tepid recovery in crude oil prices. These developments pressured the domestic economic environment considerably, manifesting in weak fiscal positions, low reserves accretion and a liquidity-challenged foreign exchange market.
The key domestic vulnerabilities were reflected in weak economic activity, persisting liquidity surfeit in the banking system, weakening financial stability indicators, contraction in private sector credit, expansionary fiscal policy and the rising debt profile of the general government. In the face of low commodity prices and accretion to external reserves, the challenges in the foreign exchange market intensified in the review period, necessitating both policy and administrative measures to rein-in demand pressure and stabilize the exchange rate. As a result, the Bank introduced several complementary measures to fine-tune existing foreign exchange management practices. The measures were: the Investors' and Exporters' (I&E) Foreign Exchange Window for willing buyers and sellers of foreign currency, increased foreign exchange sales to BDCs, and special foreign exchange auctions to targeted sectors, as well as foreign exchange sales for small scale importation, among others. Following these measures, speculative practices were curbed and the depreciation of the naira moderated with favourable pass-through to consumer prices. Thus, headline inflation moderated during the period to 15.37 per cent in December 2017 from 18.72 per cent in January 2017, although it remained above the Bank's benchmark of 6-9 per cent. Also, with improved foreign exchange supply, and the lowering of fiscal uncertainties following the launching of the Economic Recovery and Growth Plan and approval of the 2017 Federal Government Budget, the economy gradually exited recession in the second quarter of 2017. The economy grew by 0.77 per cent in 2017, after being in recession for five successive quarters. The modest growth reflected expansions in both the oil and non-oil sectors. The growth of the oil sector resulted from the moderate firming up of crude oil prices and restoration of production levels, while non-oil expansion was traceable to efforts at economic diversification and various real sector interventions of the Bank.
Monetary policy during the review period was designed to address the foregoing challenges, stimulate the economy out of recession, and achieve overall macroeconomic stability. The Bank sustained its tight monetary policy stance by maintaining the Monetary Policy Rate (MPR) at 14.0 per cent and the associated asymmetric corridor of +200/-500 basis points as well as the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) of 22.5 and 30.0 per cent, respectively.
The outlook indicates that the economy would remain on a growth path into the first half of 2018, supported by positive developments in the oil sector and other government initiatives. The near term risks to this outlook, however, remain the delay in the passage and implementation of the FGN 2018 budget, slow credit growth and poor transmission of monetary policy impulses to the real economy, which could undermine output in addition to the perennial challenges of infrastructure deficit. Also, the short to medium-term outlook for price development indicate that inflation would continue to moderate. The key risks to inflation, however, would include: the implementation of the proposed expansionary 2018 Federal Government budget and election-related spending in preparation of the 2019 general elections in the country, high energy costs and continued poor power supply, increased cost of transportation and the disruptive effects of the clashes between farmers and herdsmen, which are likely to feed into higher domestic prices. Nevertheless, monetary policy would remain proactive to minimize the threats to the achievement of the objective of price stability conducive to sustainable economic growth.
Conduct of Monetary Policy in 2016
Monetary policy environment in 2016 was shaped by a number of global and domestic economic developments. The global developments included the slowdown in global growth; the US monetary policy normalization and the associated policy divergence in the advanced economies; protracted financial market turbulence worsening global risk aversion; geopolitical tensions as well as China’s continuing transition to a balanced growth path. In addition, lower oil and other commodity prices, the growing clamor for protectionism in Europe and United States and weaker activities from some emerging market and developing economies in recession, were some of the developments that challenged policy making during the period. On the monetary side, the US Federal Reserve Bank continued its normalization of monetary policy by raising its benchmark policy rate in December 2016, giving forward guidance of more rate hikes in the near future. The development caused the US dollar to appreciate against major currencies in both the advanced economies and some emerging market and developing economies.
Although the global economy witnessed a modest recovery in the prices of crude oil and other commodities in 2016, government receipts remained low, thereby pressuring the domestic economy. This resulted in limited fiscal space, low accretion to foreign reserves, continuing depreciation of the naira and the slippage of the economy into a recession. These headwinds weakened consumer and business confidence, as well as domestic spending, and slowed economic activity. The net effect of these challenges was continued output contraction as the Gross Domestic Product (GDP) shrank by 1.5 per cent in 2016 which compares with the growth of 2.79 per cent in 2015. Price developments continued to impose significant headwinds to the efficacy of monetary policy as both the exchange rate and consumer price pressures intensified throughout the period. Monetary policy in the review period, though focused on addressing these challenges, was constrained from adjusting rapidly to avoid further hurting growth and deepening the on-going recession. While the core mandate of the Central Bank of Nigeria remains price stability, the Bank considered that rapid upward adjustments to the monetary policy rate could adversely affect the economy's recovery prospects. In consideration of the balance of risks, a cautious monetary tightening course was adopted during the review period. Thus, the MPR was raised from 11.0 to 12.0 per cent and the asymmetric corridor narrowed to +200/-500 basis points around the MPR in March 2016.The Bank further adjusted the monetary policy rate from 12.0 to 14.0 per cent in July 2016 while it retained the standing facilities corridor at +200/-500 basis points. The Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) were also held constant at their respective rates of 22.5 and 30.0 per cent throughout the review period. The pass-through of exchange rate depreciation to domestic prices owing to uncertainties surrounding the implementation of flexible exchange rate regime as well as increases in the prices of petroleum products and energy, exacerbated pressure on the domestic price level. Consequently, headline inflation rose to 18.55 per cent in December 2016 from 9.62 per cent in January 2016.
The Bank’s monetary policy in the review period, accordingly, focused on restarting economic growth, curtailing inflation, reducing unemployment rate, boosting external reserves to stabilize exchange rate and moderating liquidity levels in the banking system.
The outlook for the domestic economy in the near term is promising. On the output side, the economy is expected to recover from recession with moderate growth by the end of 2017. The outlook for domestic price developments in 2017 indicates a moderation in inflation outcomes, although achieving the Bank's single digit objective is unlikely. The upside risks to inflation in the near-term, were exchange rate volatility, cost pressures emanating from poor power supply, and rising cost of petroleum products with continuing deregulation in the downstream sector. With adequate monetary and fiscal policy coordination, the economy is likely to return to the path of price stability conducive to long-run output growth. The Bank will therefore, continue to manage liquidity conditions in the domestic economy, to ensure that the upside risks to inflation are minimized.
Conduct of Monetary Policy in 2015
In 2015, the Bank‘s monetary policy was shaped largely by continuing market expectations of the normalization of US monetary policy, weak global growth and falling crude oil prices in the international market with its negative impact on foreign exchange reserves and the exchange rates, as well as the heightened risks from geopolitical tensions in some part of the world. The fall in the level of external reserves and the depreciation of the exchange rate, as well as the liquidity impact of election-related and post-election spending, impact of the insurgency in some parts of the country amongst others put immense pressure on the domestic price level, despite the tight monetary policy stance of the Bank throughout 2015.
Consequently, headline inflation rose to 9.55 per cent in December 2015 from 8.0 per cent in December 2014. The price of food & non-alcoholic beverages remained the major driver of headline inflation in 2015. Other factors included the prices of housing; water; electricity; transport; clothing and foot wear.
The lower oil prices in the international market, coupled with reduced demand for Nigeria‘s crude oil abroad led to reduced accretion to the foreign reserves. The sustained demand pressure on the foreign exchange market following the reversal of capital flows from the normalization of US monetary policy, led to the depreciation of the exchange rate. The tapering of QE3 and its conclusion in October 2014, led to a redirection of global capital flows out of emerging and developing markets, owing largely to rising sovereign risk in these countries, and the prospect of improved interest rate regime in the U.S., Data from the National Bureau of Statistics (NBS) showed that the Gross Domestic Product (GDP) growth in 2015 stood at 2.79 per cent, compared with 6.22 per cent in 2014. The development was partly attributed to reduced public spending due to lower crude oil prices and receipts.
There was intense pressure on the exchange rate in all segments of the foreign exchange market during the review period, despite the increased funding of the market. The pressure was as a result of the crash of oil prices in the international market, lower demand for Nigeria‘s crude abroad, depletion of the foreign exchange reserves, and expectation of monetary policy normalization in the US. Consequently, the Bank in its effort to stem speculative activities, closed the official foreign exchange window but continued to intervene at the interbank foreign exchange market. This was complemented with administrative restrictions on access to foreign exchange for the importation of a list of items, that could easily be produced domestically. The choice of monetary policy instruments in the review period therefore was guided by the objectives of price stability and overall health of the macroeconomy. The Bank, accordingly, deployed a range of monetary policy instruments including: the monetary policy rate (MPR), Cash Reserve Ratio (CRR), Open Market Operations (OMO) and Discount window operations. During the period, the MPR was reduced from 13.0 per cent with the symmetric corridor of +/-200 basis points around the midpoint to 11.0 per cent with the asymmetric corridor of +200 and -700 basis points the midpoint. The Monetary Policy Committee (MPC) harmonized the CRR on both private and public sector deposits at 31.0 per cent to improve the efficacy of monetary policy, curtail abuses, stem moral hazards and the tendency of overheating the economy. The Committee (MPC) later reduced the CRR to 20.0 per cent of total reservable deposits with a caveat that the liquidity arising therefrom would only be channeled towards employment generating activities such as agriculture, infrastructural development, solid minerals and industry. The Liquidity Ratio was also kept unchanged at 30.0 per cent to address liquidity surfeit in the banking system. The performance of monetary aggregates in 2015 was weaker than projected, partly due to the sustained tight monetary policy stance and lower fiscal injections arising from falling crude oil prices. Also, there was a significant increase in credit to government, invariably crowding out private sector credit.
The money market remained active with transactions mainly in CBN bills and government securities in the first half of 2015. Money market interest rates were largely influenced by changes in the CRR, FAAC statutory disbursements and NTB maturities/auctions and introduction of the Treasury Single Account (TSA). The OBB segment witnessed greater activity relative to the interbank call segment, due to enhanced confidence of DMBs in the collaterized segment of the market from the migration to the new RTGS and Scripless Security Settlement System (S4). Nigeria‘s reference rate, the NIBOR, was relatively stable across tenors in the review period. The performance of the capital market weakened in the review period when compared with the corresponding period in 2014. The All- Share Index (ASI) decreased by 17.36 per cent to 28,624.25 at end-December 2015, from its level of 34,657.15 at end-December 2014. The decline was attributable to uncertainties surrounding the global and domestic economy as well as the outcome of the 2015 general elections, lower oil prices, and weak corporate earnings.
The Federal Government of Nigeria (FGN) bonds continued to dominate the fixed income securities market in Nigeria. Sub-national government and corporate bonds witnessed some activities, with the corporate bonds segment having the least share by market volume. The yield on the 10- year dollar-denominated bond increased to 8.48 per cent at end- December 2015, from 6.23 per cent at end-December 2014. The development was attributed to improved investors preference for higher premium to compensate for perceived higher sovereign risk as well as a successful transition programme to a new government in the country.
Conduct of Monetary Policy 2014
In 2014, monetary policy was focused on achieving the objective of price and exchange rate stability. Accordingly, the Bank sustained its tight policy stance with a view to ensuring that electioneering spending did not result in uptick in inflation. Headline Inflation remained within single digits, and fluctuated between 7.7 and 8.5 per cent, in the review period due to the combined effect of the declines in the prices of clothing and footwear; and transport components as well as the relative stability in the price of education in response to the tight liquidity measures taken at the MPC meetings during the year.
The exchange rate experienced significant pressure especially during the second half of the review period, due largely to the impact of the US Fed tapering, declining oil prices, depletion the foreign exchange reserves, and the absence of fiscal buffers. As a response, the Bank moved the exchange rate mid-point from N155/US$ to N168/US$ and widened the band around the midpoint from +/-3 per cent to +/-5 per cent.
The financial market was generally stable for 2014, although, significant fluctuations were noticed towards the end of the year. A number of policy instruments were deployed to achieve price and financial system stability, with a view to boosting investor confidence and reduce concerns about declining foreign exchange reserves.
The policy instruments used to achieve price and financial system stability objectives were the Monetary Policy Rate (MPR), and other intervention instruments such as Open Market Operations (OMO), Discount Window Operations, Cash Reserve Ratio (CRR) and Foreign Exchange Net Open Position (NOP) limit. During the period, the MPC raised MPR by 100 basis points from 12.0 to 13.0 per cent while maintaining the symmetric corridor of +/- 200 basis points around the MPR. The CRR on private sector deposits was raised by 500 basis points from 15.0 to 20.0 per cent, while CRR on public sector deposits was raised from 50.0 per cent to 75.0 per cent. The MPC also retained the Liquidity Ratio at 30.0 per cent, in order to address liquidity surfeit in the banking system.
OMO was principally used to mop up or inject liquidity into the system as a strategy for monetary management by the Bank. OMO auction increased over the corresponding period of 2013 as a result of injections into the system arising from maturity of FGN Bonds and NTBs as well as AMCON bonds. In the period under review, the economy continued to experience fluctuations in liquidity levels. To compliment OMO, the CRR was also used to manage liquidity in the system in order to smoothen the liquidity cycle, and reduce pressure on the exchange rate. Reserve money and its components trended upwards relative to their volume in the first half of 2014. Relative to the end-June 2014 values, the broad measure of money supply trend upwards, while narrow measures of money supply fell, reflecting the liquidity surfeit attributable to cyclical Federal Account Allocation Committee (FAAC) allocations and increased spending towards the 2015 general elections.
The money market remained active in the second half of 2014 with CBN bills and government securities actively traded in the market. The improvement in liquidity conditions in the financial sector continued to influence market activities along with the demand pressure in the foreign exchange market. The interbank and open buy back (OBB) rates remained locked-in within the retained policy rate corridor of MPR +/-200 basis points in the review period, except in December, 2014. Despite the rebound in the activities of the uncollateralized segment of the money market, OMO and standing facilities dominated activities in the market. The daily Nigerian Interbank Offered rates (NIBOR) experienced occasional spikes but were generally stable, reflecting periods of liquidity tightness.
The performance of the capital market declined in the second half of 2014, relative to the first half of 2014 and the corresponding period of 2013. The All Share Index (ASI) fell by 18.42 per cent to 34,657.15 at end-December 2014, from its level of 42,482.48 at end-June 2014, and by 16.14 per cent, when compared with 41,329.19 recorded at end- December 2013. The development was due largely to external factors such as the recovery in some developed economies and the effects of the US Federal Reserve tapering of its quantitative easing (QE) programme. Other macroeconomic developments that affected equities included the declining oil prices, depletion of external reserve, insurgency, and the uncertainties surrounding the 2015 general elections.
The Federal Government of Nigeria (FGN) bonds continued to dominate the fixed income securities market in Nigeria with fewer transactions recorded in the State/Local Government and Corporate Bond segments of the market. Activities in the global financial markets were characterized by uncertainties about economic recovery. For instance, while there have been rebounds in growth in the USA, growth in the EU, Japan and developing and emerging market economies continued to be constrained by a number of old and new fragilities. Accordingly, the exchange rates of major international currencies experienced mild fluctuations; and regional currencies such as the Ghanaian cedi, Kenyan shilling, the South African rand and the Egyptian pound also fluctuated.
The outlook for inflation is that the economy may experience a gradual rise in consumer prices but within single-digit target in the first half of 2015, due to increased spending in the run up to the 2015 general elections; depletion of the external reserves fuelling depreciation of the naira and its impact on food prices. These would be exacerbated by security concerns, disruption of agricultural activities and poor harvest in some areas affected by insurgency in the northern part of the country. Headline inflation is projected to oscillate around 8.6 and 9.4 per cent in the first half of 2015, and could rise to 10.8 per cent by year end. This outlook is premised on the assumption that the reduction in the pump price of refined fuels is expected to ameliorate the impact of import costs on domestic prices and that the Bank will continue to pursue a tight monetary policy stance.
Output growth in the third quarter of 2014 was 6.23 per cent down from 6.54 per cent in the second quarter. Output is projected to grow by 6.2 per cent in 2014 and 5.5 per cent in 2015. The downward projection of growth forecast of 5.5% (FGN 2015 Budget) is conservative, compared with the 7.3 per cent estimated by the IMF (Oct 2014 WEO). This is against the backdrop of emerging global developments such as falling oil price, security challenges, and infrastructural constraints. With declining oil prices and production challenges in an oil-dependent economy, achieving the growth projection requires better coordination of fiscal and monetary policies in a way that supports the non-oil sector.
Conduct of Monetary Policy (2013)
Monetary policy in 2013 aimed primarily at sustaining the already moderated rate of inflation which was achieved in the first half of 2013. The benign headline inflation rate of 8.0 per cent at end-December 2013, from 8.4 per cent at end-June 2013, is evidence of the effectiveness of the policy. Besides, monetary policy also aimed at limiting pressure on the exchange rate, boosting the external reserves position, sustaining stability in the money market and reducing the spread between lending and deposit rates. These goals were largely achieved through a mixed-grill of a number of instruments, which helped to strengthen investor confidence in the economy.
The Monetary Policy Rate (MPR) was the principal instrument used to control the direction of interest rates and anchor inflation expectations in the economy. The other intervention instruments included Open Market Operations (OMO), Discount Window Operations, Cash Reserve Ratio (CRR) and foreign exchange Net Open Position (NOP).
Open Market Operations (OMO) was the other major tool for liquidity management in 2013; achieved through the issuance of CBN bills. The sale of CBN bills declined by 52.8 per cent in the second half compared with the first half. In the second half, the volume of transactions of the standing lending facility window rose by 30.66 per cent, while that of standing deposit facility window rose by 53.6 per cent, compared with the first half.
The Monetary Policy Committee (MPC) held six regular meetings during the review period, and the MPR was successively maintained at 12.0 per cent with a symmetric corridor of +/- 200 basis points. The MPC introduced a higher Cash Reserve Ratio (CRR) for public sector deposits with the Deposit Money Banks (DMBs), in order to further tighten money supply.
Beside the change in the CRR on public sector deposits, other existing policies were retained, and complemented with administrative measures. The Net Open Position (NOP) limit was sustained at 1.0 per cent, Liquidity Ratio (LR) at 30.0 per cent and the mid-point of the exchange rate at N155/US$ +/-3.0 per cent. The decision of the MPC to retain most of the existing measures was to assure the market of the continuity of the tight monetary policy regime.
Monetary policy continued to contribute significantly to the robust performance of the economy after the shock of the global financial crisis in 2008 (on the one hand and the domestic banking crisis of 2009 on the other). In spite of these developments, output remained relatively high while inflation decelerated in 2013.
Most measures of inflation moderated throughout the period in response to the policy measures implemented by the Bank. Year-on-year headline inflation decreased to 8.0 per cent in December 2013, from 8.4 per cent in June 2013 and 12.0 per cent in December 2012. Food inflation also declined marginally to 9.3 per cent from 9.6 per cent over the same period. However, core inflation rose from 5.5 per cent to 7.9 per cent between June and December 2013.
Conduct of Monetary Policy (2012)
The monetary policy environment in 2012 was characterized by continuing threat of inflationary pressures against the backdrop of declining trend in output growth. Other key concerns included sustaining a stable exchange rate for the naira, creating a buffer for the external reserves, sustaining stability in money market rates, narrowing the spread between the lending and deposit rates and mitigating the impact of the continued slowdown in global economic activities on the domestic economy. In view of these multi-dimensional challenges, monetary policy during the period focused on deploying the mix of appropriate instruments to deliver on price stability. In addition, the slow pace of recovery in the advanced economies, the reduced growth momentum in the emerging economies and the prolonged financial fragilities in the Euro Area were some of the key considerations that defined the thrust of monetary policy in the period
Accordingly, the Bank continued with its tight monetary policy stance, which commenced in the third quarter of 2010, using the Monetary Policy Rate (MPR) as the signaling interest rate to affect money supply and rein-in inflation expectations. Open Market Operations (OMO) continued to be used as the main instrument of monetary policy, supplemented by Repurchase Agreements and Discount Window Operations to ensure optimal liquidity management. These tools were complemented with prudential requirements such as cash reserve requirement (CRR), liquidity ratio (LR) and foreign exchange Net Open Position (NOP) limit for Deposit Money Banks. Primary market transactions in government securities and foreign exchange market interventions were also used for monetary management. The Bank sustained efforts towards improving communication with market operators and other stakeholders.
The Monetary Policy Committee (MPC) held six regular meetings in the review period, during which it maintained the MPR at 12.0 per cent with a symmetric corridor of +/- 200 basis points. To further sustain the tightening stance, CRR was raised from 8.0 to 12.0 per cent and NOP limit reduced from 3.0 to 1.0 per cent at the July 2012 meeting. The LR was retained at 30.0 per cent with the mid-point of exchange rate maintained at N155/US$ within a band of +/-3.0 per cent.
Conduct of Monetary Policy (2011)
The maintenance of price stability remained the main focus of monetary policy in the second half of 2011. The challenge of managing the excess liquidity from monetary easing of 2009 – 2010 fiscal years combined with the expansionary fiscal stance, and the relatively uncertain global economic outlook, defined the monetary policy stance in the review period. The CBN employed the Monetary Policy Rate (MPR) to anchor short-term interest rates, and to rein-in inflation expectations. Open market operations (OMO) supported by reserve requirements and discount window operations (including the Standing Facilities, repos and reverse repos), remained the major instruments of monetary policy in the second half of 2011.
Efforts were made to improve communication through more regular dialogue with market and other critical stakeholders, to shape-up market sentiments and to track the pace of economic activity during the review period. The Monetary Policy Committee (MPC) held three regular meetings and one extraordinary meeting and increased the Monetary Policy Rate (MPR) by a cumulative 400 basis points to 12.0 per cent during the review period. The Bank also implemented some administrative and regulatory measures to rein-in excess liquidity and the attendant pressures in the foreign exchange market.
Monetary Policy Performance in 2008 - 2011
The conduct of monetary policy by the Central Bank of Nigeria since 2008 has been designed to: influence the growth of money supply consistent with the required aggregate Gross Domestic Product (GDP) growth rate, ensure financial stability, maintain a stable and competitive exchange rate of the naira, and achieve positive real interest rates.
The conduct of monetary policy in the review period was largely influenced by the global financial crisis which started in 2007 in the U.S. and spread to other regions and emerging markets including Nigeria. The crisis created liquidity crisis in the banking system, large quantum of non-performing credits, large capital outflows and pressure on the exchange rate, decline in oil prices and falling external reserves, sharp drop in government revenue, huge fiscal injections and collapse of the capital market.
Consequently in the wake of the global financial crisis, the Bank largely adopted the policy of monetary easing to address the problem of liquidity shortages in the banking system from September 2008 to September 2010. The monetary policy easing measures taken during the period included:
- Stoppage of aggressive liquidity mop-up since September 18, 2008
- Progressive reduction of monetary policy rate (MPR) from 10.25 to 6.0 per cent
- Reduction of cash reserve requirement (CRR) from 4.0 to 2.0 and 1.0 per cent
- Reduction of liquidity ratio (LR) from 40.0 to 30.0, and 25.0 per cent
- Introduction of Expanded Discount Window (EDW) to increase DMB's access to facilities from the CBN, and by July 2009 was replaced with CBN Guarantee of interbank transactions
- Reduction of Net Open Position (NOP) limit of deposit money banks from 20.00 to 10.00, 5.00 and 1.00 per cent
- Injection of N620 billion as tier 2 capital in 8 troubled banks
Following the restoration of stability and re-emergence of liquidity surfeit in the banking system, the Bank adopted a tightening stance from September 2010 to December 2011. The monetary policy easing measures coupled with huge fiscal expansion put much pressure on inflation, exchange rate and external reserves. To curtail these threats the stance of monetary policy changed from monetary easing to tightening, from September 2010 to December 2011 and the following monetary policy actions were taken during the period:
- The Resumption of active Open Market Operations for the purpose of targeted liquidity management
- Progressive increase in the monetary policy rate (MPR) from 6.00 to 12.00 per cent
- Increase in the Cash Reserve Requirement (CRR) from 1.00 to 2.00, 4.00 and 8.00 per cent
- Increase in liquidity ratio (LR) from 25.00 to 30 per cent
- Introduction of reserve averaging method of computing Cash Reserve Requirement (CRR), which was later stopped
- Increase of Net Foreign Exchange Open Position (NOP) of banks from 1.00 to 5.00 per cent; but later reduced to 3.00 per cent
- Shift in the mid-point of the foreign exchange band from N150/US$1 +/-3 per cent to N155/US$1 +/-3 per cent
The above policy actions taken by the CBN were within the statutory mandate of the Bank, and in the overall interest of the Nigerian Economy. The Bank's monetary policy decisions strengthened financial system stability and supported the growth of the Nigerian economy.
The links below detail the conduct of monetary policy in the following categories.