Nigeria holds rate steady, cut would send wrong signal

    Nigeria's central bank held its monetary policy rate (MPR) steady at 12.0 percent, as expected, with its policy committee rejecting a proposal to cut rates due to slower growth and core inflation because "it could send the wrong signals of a premature termination of an appropriate tight monetary stance" and "signal the preference for a higher inflation rate.
    The Central Bank of Nigeria (CBN), which started tightening policy in September 2010 and last raised rates by 275 basis points in October 2011, said rising inflationary pressures in February indicated "factors that could constitute a threat to inflation in the medium term."
    The bank's monetary policy committee voted by 9:3 to hold rates steady and rejected a proposal to raise rates as there were no major inflationary concerns at this time. 
    Nigeria's inflation rate ticked up to 9.5 percent in inflation from 9.0 percent in January, largely reflecting the base effect of the first and second round impact of the removal of fuel subsidy in January 2012 and thus sending a clear signal that there was still a risk of inflation in the near-to-medium term.

    The central bank targets inflation of 10 percent but is working to get inflation toward 6 percent.
    Taking note of an approximate 5 percent rise in the 2013 federal government budget, which is based on an oil benchmark price of $79, "potentially slows down the pace of fiscal consolidation."
    Nigeria's Gross Domestic Product rose by an annual rate of 6.99 percent in the fourth quarter, up from 6.48 percent in the third quarter. 
   For 2012 Nigeria's real GDP growth eased to 6.58 percent from 7.43 percent in 2011, mainly due to a 0.91 percent contraction in the oil sector. The main driver of growth was thus the non-oil sector, with agriculture contributing with 1.37 percent, wholesale and retail trade with 2.19 percent and services with 2.10 percent, the central bank said.
    Growth projections for this year are "relatively robust," the bank said, noting there are risks 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 central bank said growth in the domestic capital market, where bond yields have been declining steadily and equity prices were trending upwards, was due to the impact of "huge capital inflows" and quantitative easing, especially in the U.S. and the EU "is already creating a potential new round of asset bubbles globally."
    The principal risk to stability from these inflows can only be addressed through fiscal consolidation and structural reform and without these the economy will not be able to attract the long term capital inflow that can help insulate the economy from the risks of external shocks and capital flow reversals, the central bank said.

     www.CentralBankNews.info