Nigeria's central bank maintained its Monetary Policy Rate (MPR) at 12.0 percent, as expected, but warned of the key risks from rising government deficits, pressure on the exchange rate from excess liquidity in the banking system and a possible reversal of capital flows.
The Central Bank of Nigeria (CBN), which has held rates steady since October 2011, said its Monetary Policy Committee had voted by 9-1 to maintain the policy rate but also agreed to introduce a 50 percent Cash Reserve Requirement on public sector deposits, i.e. deposits from federal, state and local governments and all ministries, department and agencies (MDAs).
The central bank said it was satisfied with the recent stable macroeconomic conditions and its ability to "defend the currency in the face of capital flow reversal and significant revenue attrition has stemmed from the depreciation of the naira."
While the inflation rate is expected to remain within single digits due over the next six months due to base effects and tight monetary policy, the central bank said government spending is likely to lead to increased borrowing and warned about liquidity in the banking system.
"The Committee observed the build-up in excess liquidity in the banking system, and expressed concern over the rising cost of liquidity management as well as the sluggish growth in private sector credit, which was traced to DMB's (deposit money banks) appetite for government securities," the CBN said, adding:
"The situation is made more serious by the perverse incentive structure under which banks source huge amounts of public sector deposits and lend same to the government (through securities) and the CBN (via OMO bills) at high rates of interest."
Nigeria's inflation rate eased to 8.4 percent in June from 9 percent in May, below the central bank's target of 10.0 percent.
The Nigerian naira has dropped just over 3 percent against the U.S. dollar this year, trading at 161.8 to the U.S. dollar today and the central bank said its external reserves had risen by 9.49 percent to $47.99 billion from end-2012, cover for around 11 months of imports.
Nigeria's economy is estimated by the statistics office to have expanded by an annual rate of 6.72 percent in the second quarter, up from 6.56 percent in the first quarter, and overall Gross Domestic Product growth is estimated at 6.91 percent for fiscal 2013, up from 6.58 percent in 2012.
The contribution of oil to GDP is continuing to decline due to sustained oil theft, which has led to lower output due at a time of uncertain international oil market, weak infrastructure and downside risks due to the discovery of shale oil and the emergence of other African oil exporters that are now competing for Nigeria's traditional oil market.