The Conduct of Monetary Policy
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Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payments. However, emphasis on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms.
Conduct of Monetary Policy 2014
In 2014, monetary policy was focused on achieving the objective of price and exchange rate stability. Accordingly, the Bank sustained its tight policy stance with a view to ensuring that electioneering spending did not result in uptick in inflation. Headline Inflation remained within single digits, and fluctuated between 7.7 and 8.5 per cent, in the review period due to the combined effect of the declines in the prices of clothing and footwear; and transport components as well as the relative stability in the price of education in response to the tight liquidity measures taken at the MPC meetings during the year.
The exchange rate experienced significant pressure especially during the second half of the review period, due largely to the impact of the US Fed tapering, declining oil prices, depletion the foreign exchange reserves, and the absence of fiscal buffers. As a response, the Bank moved the exchange rate mid-point from N155/US$ to N168/US$ and widened the band around the midpoint from +/-3 per cent to +/-5 per cent.
The financial market was generally stable for 2014, although, significant fluctuations were noticed towards the end of the year. A number of policy instruments were deployed to achieve price and financial system stability, with a view to boosting investor confidence and reduce concerns about declining foreign exchange reserves.
The policy instruments used to achieve price and financial system stability objectives were the Monetary Policy Rate (MPR), and other intervention instruments such as Open Market Operations (OMO), Discount Window Operations, Cash Reserve Ratio (CRR) and Foreign Exchange Net Open Position (NOP) limit. During the period, the MPC raised MPR by 100 basis points from 12.0 to 13.0 per cent while maintaining the symmetric corridor of +/- 200 basis points around the MPR. The CRR on private sector deposits was raised by 500 basis points from 15.0 to 20.0 per cent, while CRR on public sector deposits was raised from 50.0 per cent to 75.0 per cent. The MPC also retained the Liquidity Ratio at 30.0 per cent, in order to address liquidity surfeit in the banking system.
OMO was principally used to mop up or inject liquidity into the system as a strategy for monetary management by the Bank. OMO auction increased over the corresponding period of 2013 as a result of injections into the system arising from maturity of FGN Bonds and NTBs as well as AMCON bonds. In the period under review, the economy continued to experience fluctuations in liquidity levels. To compliment OMO, the CRR was also used to manage liquidity in the system in order to smoothen the liquidity cycle, and reduce pressure on the exchange rate. Reserve money and its components trended upwards relative to their volume in the first half of 2014. Relative to the end-June 2014 values, the broad measure of money supply trend upwards, while narrow measures of money supply fell, reflecting the liquidity surfeit attributable to cyclical Federal Account Allocation Committee (FAAC) allocations and increased spending towards the 2015 general elections.
The money market remained active in the second half of 2014 with CBN bills and government securities actively traded in the market. The improvement in liquidity conditions in the financial sector continued to influence market activities along with the demand pressure in the foreign exchange market. The interbank and open buy back (OBB) rates remained locked-in within the retained policy rate corridor of MPR +/-200 basis points in the review period, except in December, 2014. Despite the rebound in the activities of the uncollateralized segment of the money market, OMO and standing facilities dominated activities in the market. The daily Nigerian Interbank Offered rates (NIBOR) experienced occasional spikes but were generally stable, reflecting periods of liquidity tightness.
The performance of the capital market declined in the second half of 2014, relative to the first half of 2014 and the corresponding period of 2013. The All Share Index (ASI) fell by 18.42 per cent to 34,657.15 at end-December 2014, from its level of 42,482.48 at end-June 2014, and by 16.14 per cent, when compared with 41,329.19 recorded at end- December 2013. The development was due largely to external factors such as the recovery in some developed economies and the effects of the US Federal Reserve tapering of its quantitative easing (QE) programme. Other macroeconomic developments that affected equities included the declining oil prices, depletion of external reserve, insurgency, and the uncertainties surrounding the 2015 general elections.
The Federal Government of Nigeria (FGN) bonds continued to dominate the fixed income securities market in Nigeria with fewer transactions recorded in the State/Local Government and Corporate Bond segments of the market. Activities in the global financial markets were characterized by uncertainties about economic recovery. For instance, while there have been rebounds in growth in the USA, growth in the EU, Japan and developing and emerging market economies continued to be constrained by a number of old and new fragilities. Accordingly, the exchange rates of major international currencies experienced mild fluctuations; and regional currencies such as the Ghanaian cedi, Kenyan shilling, the South African rand and the Egyptian pound also fluctuated.
The outlook for inflation is that the economy may experience a gradual rise in consumer prices but within single-digit target in the first half of 2015, due to increased spending in the run up to the 2015 general elections; depletion of the external reserves fuelling depreciation of the naira and its impact on food prices. These would be exacerbated by security concerns, disruption of agricultural activities and poor harvest in some areas affected by insurgency in the northern part of the country. Headline inflation is projected to oscillate around 8.6 and 9.4 per cent in the first half of 2015, and could rise to 10.8 per cent by year end. This outlook is premised on the assumption that the reduction in the pump price of refined fuels is expected to ameliorate the impact of import costs on domestic prices and that the Bank will continue to pursue a tight monetary policy stance.
Output growth in the third quarter of 2014 was 6.23 per cent down from 6.54 per cent in the second quarter. Output is projected to grow by 6.2 per cent in 2014 and 5.5 per cent in 2015. The downward projection of growth forecast of 5.5% (FGN 2015 Budget) is conservative, compared with the 7.3 per cent estimated by the IMF (Oct 2014 WEO). This is against the backdrop of emerging global developments such as falling oil price, security challenges, and infrastructural constraints. With declining oil prices and production challenges in an oil-dependent economy, achieving the growth projection requires better coordination of fiscal and monetary policies in a way that supports the non-oil sector.
Conduct of Monetary Policy (2013)
Monetary policy in 2013 aimed primarily at sustaining the already moderated rate of inflation which was achieved in the first half of 2013. The benign headline inflation rate of 8.0 per cent at end-December 2013, from 8.4 per cent at end-June 2013, is evidence of the effectiveness of the policy. Besides, monetary policy also aimed at limiting pressure on the exchange rate, boosting the external reserves position, sustaining stability in the money market and reducing the spread between lending and deposit rates. These goals were largely achieved through a mixed-grill of a number of instruments, which helped to strengthen investor confidence in the economy.
The Monetary Policy Rate (MPR) was the principal instrument used to control the direction of interest rates and anchor inflation expectations in the economy. The other intervention instruments included Open Market Operations (OMO), Discount Window Operations, Cash Reserve Ratio (CRR) and foreign exchange Net Open Position (NOP).
Open Market Operations (OMO) was the other major tool for liquidity management in 2013; achieved through the issuance of CBN bills. The sale of CBN bills declined by 52.8 per cent in the second half compared with the first half. In the second half, the volume of transactions of the standing lending facility window rose by 30.66 per cent, while that of standing deposit facility window rose by 53.6 per cent, compared with the first half.
The Monetary Policy Committee (MPC) held six regular meetings during the review period, and the MPR was successively maintained at 12.0 per cent with a symmetric corridor of +/- 200 basis points. The MPC introduced a higher Cash Reserve Ratio (CRR) for public sector deposits with the Deposit Money Banks (DMBs), in order to further tighten money supply.
Beside the change in the CRR on public sector deposits, other existing policies were retained, and complemented with administrative measures. The Net Open Position (NOP) limit was sustained at 1.0 per cent, Liquidity Ratio (LR) at 30.0 per cent and the mid-point of the exchange rate at N155/US$ +/-3.0 per cent. The decision of the MPC to retain most of the existing measures was to assure the market of the continuity of the tight monetary policy regime.
Monetary policy continued to contribute significantly to the robust performance of the economy after the shock of the global financial crisis in 2008 (on the one hand and the domestic banking crisis of 2009 on the other). In spite of these developments, output remained relatively high while inflation decelerated in 2013.
Most measures of inflation moderated throughout the period in response to the policy measures implemented by the Bank. Year-on-year headline inflation decreased to 8.0 per cent in December 2013, from 8.4 per cent in June 2013 and 12.0 per cent in December 2012. Food inflation also declined marginally to 9.3 per cent from 9.6 per cent over the same period. However, core inflation rose from 5.5 per cent to 7.9 per cent between June and December 2013.
Conduct of Monetary Policy (2012)
The monetary policy environment in 2012 was characterized by continuing threat of inflationary pressures against the backdrop of declining trend in output growth. Other key concerns included sustaining a stable exchange rate for the naira, creating a buffer for the external reserves, sustaining stability in money market rates, narrowing the spread between the lending and deposit rates and mitigating the impact of the continued slowdown in global economic activities on the domestic economy. In view of these multi-dimensional challenges, monetary policy during the period focused on deploying the mix of appropriate instruments to deliver on price stability. In addition, the slow pace of recovery in the advanced economies, the reduced growth momentum in the emerging economies and the prolonged financial fragilities in the Euro Area were some of the key considerations that defined the thrust of monetary policy in the period
Accordingly, the Bank continued with its tight monetary policy stance, which commenced in the third quarter of 2010, using the Monetary Policy Rate (MPR) as the signaling interest rate to affect money supply and rein-in inflation expectations. Open Market Operations (OMO) continued to be used as the main instrument of monetary policy, supplemented by Repurchase Agreements and Discount Window Operations to ensure optimal liquidity management. These tools were complemented with prudential requirements such as cash reserve requirement (CRR), liquidity ratio (LR) and foreign exchange Net Open Position (NOP) limit for Deposit Money Banks. Primary market transactions in government securities and foreign exchange market interventions were also used for monetary management. The Bank sustained efforts towards improving communication with market operators and other stakeholders.
The Monetary Policy Committee (MPC) held six regular meetings in the review period, during which it maintained the MPR at 12.0 per cent with a symmetric corridor of +/- 200 basis points. To further sustain the tightening stance, CRR was raised from 8.0 to 12.0 per cent and NOP limit reduced from 3.0 to 1.0 per cent at the July 2012 meeting. The LR was retained at 30.0 per cent with the mid-point of exchange rate maintained at N155/US$ within a band of +/-3.0 per cent.
Conduct of Monetary Policy (2011)
The maintenance of price stability remained the main focus of monetary policy in the second half of 2011. The challenge of managing the excess liquidity from monetary easing of 2009 – 2010 fiscal years combined with the expansionary fiscal stance, and the relatively uncertain global economic outlook, defined the monetary policy stance in the review period. The CBN employed the Monetary Policy Rate (MPR) to anchor short-term interest rates, and to rein-in inflation expectations. Open market operations (OMO) supported by reserve requirements and discount window operations (including the Standing Facilities, repos and reverse repos), remained the major instruments of monetary policy in the second half of 2011.
Efforts were made to improve communication through more regular dialogue with market and other critical stakeholders, to shape-up market sentiments and to track the pace of economic activity during the review period. The Monetary Policy Committee (MPC) held three regular meetings and one extraordinary meeting and increased the Monetary Policy Rate (MPR) by a cumulative 400 basis points to 12.0 per cent during the review period. The Bank also implemented some administrative and regulatory measures to rein-in excess liquidity and the attendant pressures in the foreign exchange market.
Monetary Policy Performance in 2008 - 2011
The conduct of monetary policy by the Central Bank of Nigeria since 2008 has been designed to: influence the growth of money supply consistent with the required aggregate Gross Domestic Product (GDP) growth rate, ensure financial stability, maintain a stable and competitive exchange rate of the naira, and achieve positive real interest rates.
The conduct of monetary policy in the review period was largely influenced by the global financial crisis which started in 2007 in the U.S. and spread to other regions and emerging markets including Nigeria. The crisis created liquidity crisis in the banking system, large quantum of non-performing credits, large capital outflows and pressure on the exchange rate, decline in oil prices and falling external reserves, sharp drop in government revenue, huge fiscal injections and collapse of the capital market.
Consequently in the wake of the global financial crisis, the Bank largely adopted the policy of monetary easing to address the problem of liquidity shortages in the banking system from September 2008 to September 2010. The monetary policy easing measures taken during the period included:
- Stoppage of aggressive liquidity mop-up since September 18, 2008
- Progressive reduction of monetary policy rate (MPR) from 10.25 to 6.0 per cent
- Reduction of cash reserve requirement (CRR) from 4.0 to 2.0 and 1.0 per cent
- Reduction of liquidity ratio (LR) from 40.0 to 30.0, and 25.0 per cent
- Introduction of Expanded Discount Window (EDW) to increase DMB's access to facilities from the CBN, and by July 2009 was replaced with CBN Guarantee of interbank transactions
- Reduction of Net Open Position (NOP) limit of deposit money banks from 20.00 to 10.00, 5.00 and 1.00 per cent
- Injection of N620 billion as tier 2 capital in 8 troubled banks
Following the restoration of stability and re-emergence of liquidity surfeit in the banking system, the Bank adopted a tightening stance from September 2010 to December 2011. The monetary policy easing measures coupled with huge fiscal expansion put much pressure on inflation, exchange rate and external reserves. To curtail these threats the stance of monetary policy changed from monetary easing to tightening, from September 2010 to December 2011 and the following monetary policy actions were taken during the period:
- The Resumption of active Open Market Operations for the purpose of targeted liquidity management
- Progressive increase in the monetary policy rate (MPR) from 6.00 to 12.00 per cent
- Increase in the Cash Reserve Requirement (CRR) from 1.00 to 2.00, 4.00 and 8.00 per cent
- Increase in liquidity ratio (LR) from 25.00 to 30 per cent
- Introduction of reserve averaging method of computing Cash Reserve Requirement (CRR), which was later stopped
- Increase of Net Foreign Exchange Open Position (NOP) of banks from 1.00 to 5.00 per cent; but later reduced to 3.00 per cent
- Shift in the mid-point of the foreign exchange band from N150/US$1 +/-3 per cent to N155/US$1 +/-3 per cent
The above policy actions taken by the CBN were within the statutory mandate of the Bank, and in the overall interest of the Nigerian Economy. The Bank's monetary policy decisions strengthened financial system stability and supported the growth of the Nigerian economy.
The links below detail the conduct of monetary policy in the following categories.