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The Monetary Policy Committee Meeting of Thursday 23rd and Friday 24th January,2020



The Monetary Policy Committee (MPC) held its 271stmeeting, the first in fiscal 2020,on the 23rdand 24thof January,2020. The Meeting held in an environment ofsluggish global economic recovery and financial marketvulnerabilities, andtepid domestic growth.The Committee appraised these developments and the outlook for the first quarter of 2020,as well as the rest of the year.All the Eleven (11) members of the Committee were in attendance. Global Economic Developments The headwinds thatcharacterizedthe global economy in 2019 showed signs of moderation,giving way toimprovedprospects for economic recovery in 2020. Consequently, global output isprojected to grow by 3.3per cent in 2020 from 2.9per cent in 2019. The downside risks to the global outlook,include: broad slowdown in the advanced economies;resurgence of financial stress in the Emerging Markets and Developing Economies (EMDEs);rising geo-political tensions in the 2Middle-East;and extreme weather conditionsin some regions. Output growth across major advanced economies,remainsfragile,due toweakrecoveryinmanufacturingactivities and sluggish risein global trade. Consequently, growth in the AdvancedEconomiesis projected to slow to 1.6 per cent in 2020,from 1.7per centin 2019. With most EMDEs facingbrighter prospects, output growth is expected to recoverto 4.4 per cent in 2020from 3.7 per cent in 2019. The major impetus for this recovery is expected to come from India, Brazil and Russia. In most advanced economies, inflationremainedbelow theirlong-run targets, reflectingweak aggregate demand in the Euro Area and Japan, as well asmoderating wage growth in the US,despite the robust job performance.Central Banks in the advanced economiesare thus, expected to continue with monetary accommodation into the medium term. In the EMDEs, however, inflation prospects remain mixed,with some economies facing stronger upside risks than others. Domestic Economic Developments Real Gross Domestic Product (GDP) continued to improve,although slowly. It grew to 2.28per cent in the third quarter of 2019, compared with 2.12 and 1.81 per cent in the preceding and corresponding quartersof 2018, respectively. The improvement ingrowth was driven,largely,by the performance of the oil sector, which grew by 6.49 per cent, while the non-oil sector grew by 1.85 per cent.Staff projections estimate real GDP in Q4 2019 and Q1 2020 at2.20 and 2.35 per cent, 3respectively. The Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMI)grew furtherin December 2019,for the 33rdand 32ndconsecutive months,to60.8 and 62.1 index points, respectively. Theoptimism in growth prospectsin Q1 2020,and the rest of the year,is anchored onthe enhanced flow of credit to the private sector,to improve manufacturing activities,and financial and exchange ratestability. In addition, the Bank’s continued intervention in Agriculture,and Small & Medium Scale Enterprises (SMEs) isexpected to boost growth. Identified headwindsto growth, however, include;uncertainty in the oil market, high unemployment, rising public debt andsecuritychallengesacross the country.The Committee noted the continueduptick in headline inflation (year-on-year) in December 2019to 11.98 per cent,from 11.85 per cent in the previous month. The increase in inflation,which wasanticipated, was largely attributableto increase in both the foodand core components,by14.67 and 9.33 per cent in December 2019 from 14.48 and 8.99 per cent in November,respectively.The increase in the food component reflects largelyseasonality effect andthe impact of the continued insurgency in some food producing areas of the country. Although,Staff forecasts suggest a short-term upward trend in prices, the Committee believes that the Bank’s continued intervention in the real sector is expected to increase domestic production and lower pricesin the medium-term.4The Committee observed that broad money supply (M3) grew by 6.22 per cent (year-to-date) in December 2019.Aggregate Credit (Net) similarly grew to 27.33 per cent in December 2019,from 23.12 per cent in the previous month. This was largely attributed to an increase in Credit toGovernment,which grew to 92.95 per cent in December 2019,from 72.36 per cent in the previous month. Credit to the Private Sector alsogrew to13.61per cent in December 2019,from 12.82per cent in the previous month. Consequently, sectoraldistributionof credit between end-May 2019 and end-December 2019was as follows: manufacturing (N446.44 billion); General Retail and Consumer Loans (N419.02 billion); General Commerce (N248.48 billion); Agriculture, Forestry and Fishing (N160.94 billion); Informationand Communications (N156.47 billion); Finance and Insurance (N129.87 billion); Construction (N86.54 billion); and Transportation and Storage (N68.61 billion),amongst others. The Committee observed with delight that, over the last six months, aggregate credit grew by N2.0trillionand urged the Management of the Bank to sustain the current momentum of improvedflow of credit to the Private Sector, while exploringother options with the fiscal authorities to strengthen thelegal framework fortheenforcement of credit recovery. Lower money market interest rates,in the review period, reflected the liquidity overhang in the banking system,resulting from the restriction of individualsand non-bank corporatesin the domestic economy from participating in OMO billauctions. Consequently, the monthly weighted average Inter-bank call and Open Buy Back (OBB) rates fell 5sharply to 3.82 and 3.24 per cent, in December 2019,from 11.42 and 10.73 per cent,respectively,in the previous month.The Committee noted the improvedperformance in the equities market,as theAll-Share Index (ASI) andMarket Capitalization grewby 11.61 and 18.27 per cent,respectively, between end-October 2019 and 10thJanuary, 2020.This was indicative of the shift by domestic investors from the money market to the equities market in response to the Bank’s policy to restrict their investments in the OMO billsauction.The MPC also noted the improved performance and sustained resilience of the banking system, evidenced by the continued moderation of the Non-Performing Loans (NPLs)ratiofrom 6.6per cent in Octoberto6.1 per cent in December2019. The Committeenoted that the improvement reflectedthe Bank’s continued deploymentof heterodox policies to ensurethat NPLs fell belowthe prudential benchmark of 5.0 per cent.Outlook Although global outputis projected to expand moderately in 2020, compared with the previous year, the overall medium-term outlook for the global economy remainsuncertain, due to the persistence of several headwinds. These include: the lingering trade tensionsbetween the US and its major trading partners;rising levels of both corporate and public debts;continued geopolitical tensionsin the Middle-East;fragile recoveryof manufacturing activities;and the 6narrowingpolicy space by which central banks in the advanced economies can respond to future macroeconomic shocks.In addition, predictedweather-related disasters could pose further threatsto global output recovery.Onthe domestic side, available data on key macroeconomic indicatorsshow prospects of improved output growth for the economy in 2020. Revised projectionsfor 2020,showthat the economy is expected to grow by 2.50 per cent (IMF), 2.10 per cent (World Bank)and 2.35 per cent (CBN). The underlying projectionis anchored on the followingconditions: enhanced flow of credit to the real sectorof the economy; sustained stability in the exchange rate; continuedCBN interventions in agriculture and non-agricultural Small and Medium Enterprises (SMEs);andtheeffective implementation of the Economic Recovery and Growth Plan (ERGP).The downside risksto this projectionareprimarily the risingstock ofpublic debt and lack of fiscal buffers. Others include the persistent security threat in major food-producing areas, poor and inadequate infrastructure and weak public and privatesectorinvestment.The Committee’s ConsiderationsThe Committee noted the persistent increase in the inflation rate, which stood at 11.98 per cent in December 2019.It also notedthat the inflation was driven by both monetary and structural factors. Having addressed the monetary factors,the headroom for further monetary policy measureshas becomeconstrained,being 10The Committee’s DecisionOn the arguments to tighten, the Committee noted that given that inflation rate inched up in December 2019 and that the rate is still above the upper band of the 6-9 per cent threshold, tightening may be necessary to tame the rising trend in inflation. In addition, the relatively bearish outlook of the equities market indices points to waning investor confidence in equity in preference for coupon rate on bonds. Raising the policy rate, could be a policy choice to reverse the tendency and attract more foreign portfolio investments. Also, the risks to the level of reserves persist as prices of oil futures remain uncertain. Policy tightening wouldenhance the accretion to foreign reserves and attain relative stability in the foreign exchange market. Moreover, raising rateswould reinforce the stability of the foreign exchange market as an upswing in the rate will inhibit demand pressures in the market through a decline in money supply.Althoughtightening would limit the ability of DMBs to create money,ultimately leading to a reduction in money supply and curtail their credit creationcapabilities, which would eventually lead to rising cost of credit and credit risk as DMBs re-price their risk assets, the MPC believes that the aggressive pursuit of the current loan-to-deposit ratiopolicy thrust would continue to help to catalyze credit growth and positively impact growth and prices.On the decision to loosen, members noted that the relative stability in the foreign exchange market provides confidence to foreign 11investors. There is, therefore, no immediate concern that loosening would exert pressures on the foreign exchange market in the near term. In addition, an accommodative monetary policy stance would motivate banks to lend to maintain their profit performance and wouldresult in decline of the overall cost of production. This would further affirm the Bank’s support for stimulating output growth. The Committee also feels that the downside to loosening is that it could amplify inflationary pressuresas the economy experiencesincreased liquidity surfeit, particularly if looseningdrives growth in consumer credit, without corresponding adjustment in output, thus escalatinginflationary pressures. An interest rate reduction would increase money supply and exert pressure on the exchange rate. Moreover, an accommodating monetary policy stance may not necessarily lower the retail lending rate, as interest rates are generally sticky downwards.On the argument for a Hold, the MPC acknowledged that a mix of heterodox monetary and financial policy measures have recently been deployedby the Bank. Noting the existence of a lag between the policy pronouncement and its impact on the economy, a hold in the rate would ensure its efficient impact on the economy. The Committee noted the slow pace and low rate of economic growth as real GDP growth of 2.10, 2.12 and 2.38 per cent in Q1, Q2 and Q3 2019, respectively, being below the population growth rate, still needs 12sustained policy support. Maintaining monetary policy rate at its present level is essential for sustainable support to growth before any possible adjustments. This will enable policy to react suitably to developments as they occur in the near term. In addition, retaining the current policy position provides avenues to evaluating the impact of the heterodox monetary and financial policies to support lending by the banking industry without altering the policy rate. On the downsides to holding, the Committee noted that it would reduce the speed of economic recovery relative to loosening, exert a dragon output growth, as DMBs continue to utilize bonds sales instead of engaging in financial intermediation to the private sector.In view of the foregoing, the Committee by a decisionof 9 members, votedto alterthe Cash Reserve Requirement (CRR) by 500 basis points from 22.5 to 27.5 per cent,while leaving all other policy parameters constant.Two members voted to leave all parameters constant.In summary, the MPC voted to: 1. Change the CRR from 22.5 to 27.5 per cent; 2.Retain the MPR at 13.5 per cent; 3. Retain the asymmetric corridor of +200/-500 basis points around the MPR; 4. Retain the Liquidity Ratio at 30 per cent. 13Thank you. Godwin I. Emefiele Governor, Central Bank of Nigeria 24th January, 2020

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