The Central Bank of Nigeria Tuesday resolved to keep the Monetary Policy Rate (MPR), otherwise known as the benchmark interest rate at 12 per cent.
Addressing journalists in Abuja after the two-day meeting of the Monetary Policy Committee (MPC), CBN Governor, Mallam Sanusi Lamido Sanusi, said the committee also took a unanimous decision to leave the Cash Reserve Requirement (CRR) as well as the Net Open Position unchanged at 12.0 per cent and1.0 per cent respectively.
He said the committee noted that its decisions at the previous MPC meeting had achieved the desired results, although banks' lending rates had shot up.
Specifically, he noted that earlier monetary tightening decisions had helped decelerate inflation rate which reduced to 11.7 per cent in August, compared to 12.8 per cent in July.
Sanusi, who read the communiqué No. 85 of the MPC, said the committee expressed concerns that lending rates have remained high and enjoined the apex bank to sustain its efforts towards the reduction in interest rate spread, while stabilising interbank rates to sustain liquidity and facilitate intermediation in the banking system.
He said: "The Committee noted that this can only be achieved by sustaining the current efforts at reducing overheads in the banking industry and deepening capital market reforms to diversify sources of finance for the real economy, and complement bank loans.
"The committee observed that the recovery in the Nigerian capital market continued during the review period, as equities market indicators were positive. The All-Share Index (ASI) increased by 9.96 per cent between June 29, 2012 and August 31, 2012, while Market Capitalisation (MC) increased by 9.64 per cent during the same period."
He also said the CBN planned to enforce tighter monetary conditions by keeping a tab on how much money comes in from capital inflows adding that about $1.4 billion was recorded in the month of August.
Meanwhile, the CBN Governor, however, noted that on a year-on-year basis, the External reserves increased by $ 8.88 billion or 27.0 per cent compared with $ 32.93 billion recorded at the of end August 2011.
According to him, the increase in the reserve level had largely been driven by proceeds from crude oil and gas sales as well as crude oil related taxes, adding that the current position of the foreign reserves could finance over seven months of imports.
On the global economic outlook, Sanusi said there were still signs of further weakness in the last three months, with the latest data not showing any evidence of improvement up to the beginning of the third quarter of 2012.
He said: "The Committee also observed that the weak growth resulted from considerable financial market fragilities in the euro area with resultant negative spillover effects to other regions, uncertainty resulting from the Eurozone crisis as well as poor macroeconomic performance in other advanced economies. Rising food and energy prices is also a contributory factor. "
Continuing, he said:"Overall, the MPC believes that the current rise in crude oil prices and the tight monetary policy regime presented an opportunity for building reserve buffers in the light of the uncertainties surrounding the global economy".
He said the committee identified key policy challenges to include protecting the domestic economy and building external reserves buffer and that potential large inflow of "hot money" resulting from further monetary easing in the US and Europe and improved yield on fixed income instruments.
"The Committee noted that this moderation in headline inflation has not been accompanied by a significant decline in core inflation. Given the unpredictability of food prices, there is a need to watch this trend as we approach year-end before altering the present monetary stance," he said.
Sanusi said: "Interest rates in all segments of the money markets rose initially, in response to the increase in the Cash Reserve Requirement (CRR) by 400 basis points at the MPC meeting of July 21 and 22, 2012. The rates, however, trended downwards toward the end of the review period. The inter-bank call and OBB rates, which opened at 17.85 and 14.99 per cent, closed at 14.19 and 13.56 per cent, respectively, during the review period. Developments in the interest rate structure indicated that the retail lending rates remained high in August 2012.
"The average maximum lending rate increased marginally to 23.76 per cent in August 2012 from 23.45 per cent in July. However, the average interest bearing deposit rate declined to 6.24 per cent in August 2012 from 6.64 per cent in July. Thus, the spread between the average maximum lending rate and the average interest-bearing deposit rate widened to 17.53 per cent in August 2012 from 16.81 per cent in July."
The CBN Governor said in view of developments in the global and domestic economy and the financial markets, the Committee noted that the weak global growth indices called for cautious optimism by policymakers stressing that the resolution of the euro area debt crises remained a major concern even with the approval of the efforts of the European Central Bank to address the debt crises in the euro area by the German Constitutional Court.
According to him, the July MPC meeting appeared to have had some positive impact in a number of areas, namely: a deceleration in year-on-year inflation in August 2012, stability of short term interest rates around the Monetary Policy Rate (MPR), buildup in external reserves and stability in the exchange rate. But core inflation is still high at 14.7 per cent in August.
He said the threat of increased inflow of hot money arising from the actions of the US Fed to further stimulate the economy through its QE3 activities and its capital reversal implications were noted by the committee.
He also cautioned against a hasty deployment of the windfall to immediate consumption as the trend could be reversed.
"Monetary policy could not, therefore, under the circumstance, react to what may be purely temporary developments," he added.
Sanusi said: "Despite the threats from a combination of global and domestic factors, the Committee noted that the level of economic growth in the third quarter of 2012 remained robust and the year-end forecast would likely be met owing largely to the improvements in power supply and the steady progress of reforms, actions in respect of the alleged fraud in the petroleum subsidy regime and improved fiscal operations. The Committee noted that these measures, generally take time to impact the real economy."