Nigeria's central bank held its Monetary Policy Rate (MPR) steady at 12.0 percent citing a "benign" outlook for inflation over the next six months and a significant reduction in the risks of currency instability following the Federal Reserve's decision to delay a tapering of its asset purchases and an improved outlook for financial stability in Europe after the German elections.
The Central Bank of Nigeria (CBN), which has held rates steady since October 2011 and last month introduced a controversial 50 percent cash reserve requirement on public sector deposits by banks, said one of its 12 council members had voted to cut the MPR by 50 basis points.
Despite the stability of the naira's exchange rate due to the central bank's "very tight" policy and support during the recent depreciation of many currencies of emerging and frontier markets, the CBN said the Federal Reserve's eventual tapering of its asset purchases and higher long-term interest rates "portends uncertainties in external conditions for emerging markets and developing economies, including Nigeria."
"The clarifications provided by the Fed over its QE3 policy brought substantial relief to the financial markets globally and initiated a reversal of the trend in capital outflows from the country," the central bank said.
The naira weakened sharply in early June but has appreciated in the last two weeks. It was trading at 160.75 to the U.S. dollar earlier today compared with 156.14 at the start of the year.
The CBN said a survey of more than 30 countries showed that the naira had remained one of the most stable, depreciating by only 2.3 percent year-to-day compared with "the massive depreciation in the value of other currencies, such as the Indian Rupee, the Indonesian Rupiah, the Brazilian Real, the South African Rand and the Ghanaian cedi."
Nigeria's inflation rate eased to 8.2 percent in August from 8.7 percent in July "in response to the tight stance of monetary policy" with core inflation up 7.2 percent from 6.6 percent in July.
The CNB noted with satisfaction that headline inflation had remained below 10 percent for eight straight months, representing the lowest level achieved over the past five years and the longest stretch since 2008, and that outlook indicates that inflation will remain in single digits for the next six months.
"The Committee was nonetheless, conscious of the potential risks on the horizon, including the possibility of pressures coming from the fiscal activities of the government in the later part of the year, and in the run up to the 2014 elections," the CBN cautioned.
Nigeria's external reserves had slipped to US$45.27 billion as of Sept. 19, though the were still up by 9.91 percent from end-September 2012.
However, the central bank said this level of increase was too low "given the relatively high price of crude oil and further underscores the need for much-needed reform of the oil sector."
The expansion of Nigeria's economy slowed in the second quarter with the Gross Domestic Product expanding by an annual 6.18 percent, down from 6.56 percent in the first quarter.
"Overall, GDP growth for fiscal 2013 was projected at 6.91 percent, up from 6.58 percent in 2012," the CBN said.