November 24, 2015/CBN

The Monetary Policy Committee met on 23rd and 24th November, 2015 against the backdrop of slowing global growth and a weakening domestic economic environment, attributable largely to the down turn in oil prices. In attendance were 10 out of 12 members. The Committee appraised the global and domestic economic and financial environments up to October 2015 as well as the economic outlook for the first half of 2016.

Committee’s Considerations

The Committee acknowledged the continued fragile global economic environment, including the possibility of monetary policy normalization in the United States; poor outlook for commodity prices and further slowdown in the Emerging Markets and Developing Economies. The MPC also noted the fragility of the domestic macroeconomic environment; reflected partly in low output growth, soft oil prices, low credit to the high elasticity sectors of the economy and sustained inflationary pressure, which however, softened moderately in October. The MPC was, particularly, concerned that the previous liquidity injections embarked upon through lowering of the Cash Reserve Ratio (CRR), in the last MPC, has not transmitted significantly to improved credit delivery to key growth and employment in sensitive sectors of the economy.

Rather, credit went to sectors with low employment elasticity. The Committee restated its commitment to evolve and implement measures that would be supportive of consolidating and strengthening output growth, however, with an eye on price stability. The Committee, however, recognized the limits of monetary policy under conditions of huge infrastructure gap and significant global financial market fragilities. While noting the imperative of complementary fiscal policies to augment monetary policy, under the circumstance, monetary policy must remain bold in charting the desired course that would stimulate sustainable output growth in the country.

Concerned about the state of unemployment in the country, the MPC evaluated various options for ensuring increased credit delivery to the key growth sectors of the economy, capable of generating employment opportunities, and improving productivity. The Committee underscored the need for the Deposit Money Banks to ensure that measures taken by the Central Bank to inject liquidity and stimulate the economy adequately translate into increased lending to the sectors with sufficient employment capabilities and the potential to generate growth. Accordingly, the MPC agreed that going forward any attempt by the CBN at easing liquidity into the system shall be directed at targeting real sector, infrastructure, agriculture and solid minerals. The MPC further directed the Bank’s Management to put in place necessary measures/regulations to ensure strict compliance by the DMBs. This is aimed at ensuring that employment and productivity is stimulated while also moderating prices.

The Committee noted with satisfaction the stability, soundness and resilience of the banking system even against adverse global financial conditions. Given the situation, the MPC emphasized the necessity of focusing on financial market stability and proactive engagement of policy and administrative levers needed to support the environment in which market institutions operate.  On their part, market institutions are encouraged to employ more stringent criteria in evaluating their portfolio and business decisions.
The MPC considered that although, headline inflation had remained at the borderline of single digit, the observed moderation, especially in the month-on-month inflation, provided some room for monetary easing to support output in the short to medium term, while keeping in focus the primacy of price stability. In effect, the Committee will continue to monitor developments around the Naira exchange rate, interest rates, and consumer prices, even as target measures are needed to channel liquidity to the key sectors of the economy in an
attempt to drive growth. The Committee noted that close coordination between monetary and fiscal policy was imperative for sustainable growth enhancing policies.

The Committee’s Decisions

In consideration of the weakening fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment, the MPC, by a vote of 8 out of 10, reduced the MPR from 13.0 to 11.0 per cent while 2 members voted for a retention of the rate at 13.0 per cent; 7 members voted to reduce the Cash Reserve Requirement (CRR) from 25.0 per cent to 20.0 per cent while 3 members voted to hold. In addition, 8 members voted for an asymmetric corridor of +2/-7 per cent while 2 voted to retain the symmetric corridor of +/-2 per cent around the Monetary Policy Rate (MPR).

The MPC emphasized that the liquidity arising from the reduction in the CRR to 20 per cent, will only be released to the banks that are willing to channel it to employment generating activities in the economy such as agriculture, infrastructure development, solid minerals and industry.

In summary, the MPC voted to:
(i) Reduce the CRR from 25.0 per cent to 20.0 per cent;

(ii) Reduce the MPR from 13.0 per cent to 11.0 per cent;

(iii) Change the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis
points and -700 basis points, around the MPR.