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Nigeria's central bank kept its monetary policy rate (MPR) steady at 14.0 percent, as expected, but three of the 10 members of its monetary policy committee voted to raise rates, arguing inflation is still above the bank's target range and tightening would help "stem the tide of capital flow reversals in the face of sustained monetary policy normalization in the US."

The Central Bank of Nigeria (CBN), which has maintained its key interest rate since July 2016, added a rate hike would curb inflationary pressures while fiscal injection, including an expected build-up in pre-election spending, would help provide the economy with "substantial liquidity."

Although the monetary policy committee (MPC) - which met in April for the first time this year after a dispute between the senate and president was resolved - "strongly" considered a rate hike, a majority of its members concluded that economic and financial risks appeared fairly balanced and keeping the rate unchanged would help support growth and further moderate inflation.

Two of the MPC members voted to raise the MPR by 50 basis points while one voted to raise it by 25 points.

During its two-day meeting, the MPC also considered the consequences of lowering the rate to help stimulate demand but rejected this option in light of the expected liquidity injection from the 2018 government budget, increased FAAC (The Federation Accounts and Allocation Committee) disbursements and election-related spending ahead of next year's election, which would "exacerbate inflationary and exchange rate pressures as well as return the real interest rate into negative territory."

Nigeria's inflation rate has declerated steadily in the last seven months and fell to 11.23 percent in June from 11.61 percent in May. However, it is still well above the CBN's target range of 6 - 9 percent.

The country's economy shrank in the first quarter from the previous quarter by 13.4 percent and on an annual basis, it only grew by 1.94 percent, slightly down from a 2.1 percent growth rate in the fourth quarter of last year.

In light of the public sector's "preference" for loosening, the CBN said it was concerned that its policy rate may have lost its signaling effect and the decision to maintain the policy stance was to monitor the magnitude of the liquidity impact of fiscal injections and election-related spending.

But to encourage banks to increase the flow of credit to the real economy, the CBN will encourage large companies that are credit constrained to issue commercial paper to meet these needs and the central bank "may, if need be, buy these instruments" to complement the efforts of banks.

And as a way of incentivizing banks to increase lending to manufacturing and agricultural sectors, the CBN said it plans to implement a "differentiated dynamic cash reserves requirement" regime that directs long term bank credit at 9 percent with a minimum tenor of 7 years and a 2-year moratorium to employment elastic sectors of the economy.


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