Nigeria holds rate, says it's premature to cut rates

    Nigeria's central bank held its Monetary Policy Rate (MPR) steady at 12.0 percent, as expected, saying it would be premature to cut rates in light of the risk that inflation may accelerate if there is a need for increased government spending in the short-to-medium term.
    The Central Bank of Nigeria (CBN) said its monetary policy committee had voted by seven votes to three to maintain the policy rate along with the cash reserve requirement and the liquidity ratio.
    "The Committee was convinced that in view of the successes achieved in all fronts - banking stability, low inflation, exchange rate stability, strong reserve buffers and recovery in the equities market, there is no reason at this point to change a policy that has worked so well," the CBN said.
    The CBN, which last raised rates in October 2011, said it was concerned over the low level of credit growth to the private sector, attributing this to the crowding out effect of high growth in credit to the public sector.
    Government spending is expected to rise this year and recent military action in the north-east of the country will result in additional spending, the CBN said.
    "Overall, the Committee is of the view that government spending will constitute a major risk to the inflation and exchange rate outlook, thus advising prudence in monetary policy action at this time," it said.

     On Monday Nigeria's finance minister, Ngozi Okonjo-Iweala said a small rate cut would help economic activity but knowing the central bank governor, he was sure rates would be maintained.

    In April, Nigeria's inflation rate rose to 9.1 percent inflation from 8.6 percent in March, but down from 2012's average of 12.2 percent. For the first quarter, inflation was 8.6 percent compared with 12.1 percent in the first quarter of 2012.

    The CBN targets inflation of 10 percent.
    "The inflation outlook remains relatively benign with projections of headline inflation remaining in the single digit range for the next six months," due to base effects, muted growth in monetary aggregates and exchange rate stability, the CBN said, adding:
    "The principal risks to the outlook remain fiscal spending and possible pressures on the exchange rate from any attrition to reserves caused by declining revenues as a result of output leakages."
    Nigeria's foreign reserves to by 12.1 percent to US$ 49.13 billion as of May 16 from end-2012, mainly due to increased portfolio capital inflows.
     Revenue from oil  exports account for almost 80 percent of the Nigerian government's revenue and the CBN said it was concerned by the uncertain oil market, high output leakages from oil theft which affects the oil sector's contribution to economic output and the "prospects for declining output if the state of affairs continues."
    Nigeria's economy expanded by an annual rate of 6.6 percent in the first quarter of 2013 from 6.9 percent in the fourth quarter and the CBN expects second quarter Gross Domestic Product to rise by 6.72 percent, mainly due to growth in the non-oil sector, agriculture, wholesale and retail trade.
    However, the relatively robust growth forecast for 2013 is hinged on favourable conditions for agriculture and there are risks from widespread insecurity, weak infrastructure, probable flooding from projected heavy rains in some parts of the country and the state of emergency in the North East and military operations there that could affect economic activities.

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