TO check the inflationary trend that may arise from election spending, the Central Bank of Nigeria (CBN) has decided to keep its benchmark interest rate unchanged at 6.26 per cent.

Addressing newsmen on the outcome of the Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, CBN governor, Mallam Lamido Sanusi, stated that the move was necessitated by rising government expenditure and borrowings with the possible crowding out effects on the private sector; and demand pressure in the foreign exchange market, leading to reduction in external reserves.

He pointed out that the MPC’s decision would also allow a previous rate hike in September this year to filter through the system, adding that it was a way of switching attention from boosting growth to battling inflation.

According to Sanusi, the monetary policy rate (MPR) was left at 6.25 per cent, even after inflation slowed for two months in a row, stressing that the corridor around the MPC rate was adjusted to plus and minus 2 percentage points,  which would leave the lending rate unchanged at 8.25 per cent, while raising the deposit rate by one percentage point to 4.25 per cent.

Inflation was slightly changed at 13.4 per cent last month, compared with 13.6 per cent the month before and the CBN’s target of less than 10 per cent, as a good harvest helped to reduce food prices. The persistence of high inflation remains a challenge, Sanusi also said yesterday, while reaffirming the bank’s commitment to price and exchange rate stability.

“After due consideration of the pros and cons of the various policy options, the committee agreed to retain the current MPR, given the need to retain flexibility and allow the effects of the previous rate increase to work through the system.

The committee agreed on a majority decision, of six to four members, to retain the current monetary policy rate on the need to retain flexibility and allow the effect of the interest rate decision to work through the system against the argument for immediate increase of the rate, he said.

Sanusi also projected the Gross Domestic Product (GDP) growth of 8.29 per cent in the fourth quarter compared to 7.86 per cent in the third quarter.

Full-year economic growth was forecast at 7.85 per cent, up from 6.96 per cent in 2009, adding that the exchange rate remained stable in the near term. Analysts believe the MPC took the right decision trying to check inflation, stating that there was going to be huge spending on public sector pay rise, elections and AMCON which will soak up bad bank loans in return for government bonds.

According to the Head of Research for Africa at Standard Chartered, Razia Khan, “with fiscal spending likely to go into overdrive ahead of the elections, it is more a case of when more tightening measures will follow.

For now, however, given continued uncertainty in the outlook, not least with oil output under pressure again, and concerns over too rapid a correction in the bond market, the latest move should be seen as normalisation of policy.”

On his part, a researcher with Greengate Strategic Partners, Mr Kayode Akindele, said: “The committee acknowledged the growing inflationary pressure in the economy, especially in terms of food prices, and given their price stability mandate a rise in MPR was expected. The rate was, however, maintained by a narrow one vote majority which suggests a rise at the next meeting.

“The corridor was narrowed, which increased the deposit rate instead, which they hope will encourage banks to deposit more money with the CBN and out of circulation. This would however discourage growth in private sector credit which has been very low since the banking crisis and needs to grow more rapidly.

“The MPC again emphasised the need for supply side reforms, especially in agriculture and energy, by the government to curtail inflationary pressures in the medium to long term and also warned about the rapid expansion in government borrowing, also voiced recently by the World Bank and how it is encouraging inflationary spending and crowding out the private sector from the debt markets.”

In the external sector, Mallam Sanusi said the foreign exchange market remained relatively stable, as the total foreign exchange inflow in October was $2.38 billion, representing a decrease of $0.32 billion in $2.70 billion recorded in the preceding month.

Total outflows in October amounted to $3.46 billion, a decrease of $1.62 billion from $5.08 billion recorded in the preceding month.

Consequently, the net outflow during this period was $1.09 billion. Inflows from autonomous sources in October were $10.43 billion, compared with $7.55 billion in September.

Cumulatively, from January to October 2010, total foreign exchange inflows to the market amounted to $88.32 billion, comprising funds from the CBN ($21.15 billion) and from autonomous sources such as oil companies, international institutions and home remittances ($67.17 billion).

The committee noted with satisfaction the complementary role of autonomous inflows in moderating demand pressure in the foreign exchange market.

At the interbank segment, he said the average buying and selling rates for October were N151.68 per dollar and N151.78 per dollar, compared with N152.51 per dollar and N152.61 per dollar respectively in September, representing an appreciation of 83 kobo.

Mallam Sanusi said the gross external reserves stood at $34.27 billion on November 15, compared with $33.597 billion at end-October and $34.59 billion at end-September.

To ensure that the economy was put on sound footing, the apex bank boss said the committee had arrived at a number of decisions, which included the retention of the Monetary Policy Rate (MPR) at 6.25 per cent and to adjust the corridor to +/- 200 basis points, implying Standing Lending Facility (SLF) rate of 8.25 per cent, and Standing Deposit Facility (SDF) rate of 4.25 per cent.

Other decisions arrived at included maintaining the policy stance of a stable exchange rate and the resolve to continue to monitor inflationary trends.

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