Nigeria's central bank maintained its Monetary Policy Rate (MPR) at 12.00 percent, as expected, but said it had not yet reached the end of its tightening cycle and may need to tighten in 2014 in response to potential headwinds from higher interest rates in the United States and Europe and domestic spending ahead of the 2015 elections.
The Central Bank of Nigeria (CBN), which has held rates steady since October 2011, also said it's monetary committee had adopted an inflation target of 6.0 percent to 9.0 percent in 2014 - the same as this year - and "reaffirmed its commitment to moving Nigeria firmly into being a low-inflation environment in the medium term."
Nine of the committee's 11 members that were present voted to maintain rates while one member voted to cut the MPR rate by 50 basis points and raise the public sector cash reserve requirement (CRR) to 75 percent from 50 percent. Another member also voted for a 50 point cut in the MPR but to raise the public sector CRR to 100 percent.
Nigeria's inflation rate fell further to 7.8 percent in October, a low for the year and continuing the trend since early 2010 of falling inflation. The last time Nigeria's inflation was at this level was in March 2008 when also hit 7.8 percent.
But core inflation rose to 7.6 percent from 7.4 percent in September and the "Committee noted the potential risks to inflation of increased aggregate spending in the run-up to the 2015 elections."
The central bank expects a continued benign outlook for inflation in the first half of 2014, adding that global monetary conditions were likely to remain loose going into the first quarter of next year.
"First, in the U.S.A., it is clear that the incoming Federal Reserve Chairperson, Janet Yellen, does not see tapering as imminent given the on-going disputes around the budget and the weakness of economic recovery," the CBN said.
It also noted that the Bank of England (BOE) was not considering raising rates until unemployment falls to 7.0 percent, probably in late 2015; the European Central Bank (ECB) had only just lowered its benchmark rate while the Bank of Japan (BOJ) is likely to continue with quantitative easing until inflation reaches its 2.0 percent target.
"For these reasons, the Committee does not anticipate any major internal or external shocks before its next meeting in January 2014," the CBN said.
Nigeria's economy has been steadily expanding with Gross Domestic Product up by an annual 6.81 percent in the second quarter, up from 6.18 percent in the first quarter.
The central bank forecast 2013 growth of 6.87 percent, down from a forecast or 6.91 percent in September, but up from 6.58 percent in 2012. The non-oil sector remains the major engine of growth, with output expanding by 7.95 percent in the third quarter compared with a decline of 0.53 percent for the oil sector.
But the central bank cautioned that financial markets were "extremely fragile and susceptible to external shocks," noting that excess crude savings have fallen to less than US$5 billion on Nov. 14 from $11.5 billion at the end of 2012 with Nigeria's external reserves in excess of $45 billion only due to a massive inflow in portfolio funds.
The central bank called on the government to rebuild buffers in the excess crude account by blocking fiscal leakages in the oil sector and raising oil revenues.
"Clearly, the major risk on the fiscal side at present is not one of escalation of spending but loss of revenue from oil exports," the CBN said.
But the central bank is worried about the outlook for next year, saying the Federal Reserve is expected to start tapering its quantitative easing while interest rates will also rise in Europe, "both of which will lead to some pressure on the exchange rate and stock prices due to the impact on capital flows."
In addition, the CBN expects domestic spending to pick up in connection with elections.
"As a result, the MPC is of the view that we are not yet at the end of the tightening cycle and may need to tighten further in response to these eventualities next year."
Like many other currencies, Nigeria's naira fell sharply in May and hit a low of 163.7 to the U.S. dollar on Sept. 11, down 4.5 percent from 156.35 at the end of 2012. But since then the naira has strengthened and was trading at 159.1 earlier today, down only 1.7 percent on the year.