Excerpts from the September 2014 CBN MPC

The last MPC meeting of the CBN in September was an anti-climax as everything the Godwin Emefiele, CBN Governor, mentioned during his press briefing suggesting the bank was set to tighten monetary policy. Curiously they left everything unchanged. Recently, the apex bank released minutes of the meeting with statements by members and as ever Abdul-Ganiyu Garba delivered a rousing piece. Enjoy!


I voted for a forward looking policy stance that is consistent with (1) current monetary policy strategy, (2) current and expected domestic pressures and (3) anticipated global pressures. The real macroeconomic data for the second and third quarter of 2014 indicates good performance: 6.54% in the second quarter and about half a million jobs created in the first two quarters of 2014 albeit with more than three quarters in the informal sector. The financial data (inflation, money supply, the capital market indexes, forex market data), fiscal data and external data indicate the pressure points in the economy. The developments in the global economy particularly the separation between the Euro-zone and the United States in terms of economic performance and monetary policy stance indicate a great likelihood of instabilities in financial markets particularly foreign exchange markets in the fourth quarter of 2014 and through 2015.

The impacts of maturing AMCON Bonds in the fourth quarter (October, 2014) on liquidity demand proactive actions to sterilize “inverted intermediation liquidity”. Staff forecast that inflation is likely to overshoot the upper bound of 9% in the fourth quarter even without accounting for AMCON effects strengthen the case for sterilization of inverted intermediation liquidity.

I vote for tightening of liquidity by raising private sector CRR while keeping MPR fixed at 12%, liquidity ratio at 30%. In addition, I vote for asymmetric corridor of -5 and +2 around the MPR. I have consistently justified the asymmetric corridor on the “market functioning” argument. The vote for tightening is a vote to sterilize “inverted intermediation liquidity”. Were excess liquidity channeled to high employment elasticity sectors of the economy, tightening will be unnecessary.

Indeed, I am convinced that if excess liquidity were channeled to high employment elasticity sectors of the economy, interest rates will most likely fall especially if the SDF rate is significantly reduced. As is, Deposit Money Banks have found it more rational to hold excess liquidity for the secure and attractive returns from the game of inverted intermediation. It is clear to me that the Standing Deposit Facility (SDF), government securities and currency substitution are weakening market functioning and destabilizing key nominal anchors for monetary policy. It is necessary to sterilize such liquidity particularly, because they are inherently and structurally destabilizing given their likely effects on price stability.

Market functioning remains a major challenge for efficient allocation of financial assets and for a stronger transmission mechanism of monetary policy which has weakened and become more asymmetric globally in the aftermath of the global financial crisis.

Much of the expansion in the balance sheets of Central Banks in the aftermath of the global financial crisis has had limited effects on real variables, stronger effects on asset prices and adverse effects on income distribution with the top 1% the top gainers and the low and middle classes the most losers.

Without significant “market-function-improving”, it will be difficult to strengthen the transmission mechanism of monetary policy and empower it to support the sectors of the economy and businesses that have high employment elasticity of growth. Available data point to more activities in the interbank market in the last two months. A significant reduction in the incentive for the high “inverted intermediation liquidity” in the SDF window will support the interbank market. Tightening of CRR simultaneously with significant reduction in SDF rate will further spur activities in the interbank market.

Far too much is expected of monetary policy today. However, faced with impossible trinities (exchange rate stability, independent monetary policy and capital account liberalization) and possible but malfunctioning trinity of policies (monetary, fiscal and politics), it is important to stress that monetary policy is not a panacea (a cure all). It has to be complemented by market-function-improving institutional changes, more effective monetary-fiscal policy strategic co-ordination as well as sound macro-prudential and micro prudential regulations. The greater challenge for economic management (monetary, fiscal and political economy) is that of steering the economy seamlessly through the coming turbulence of a post quantitative easing era. Monetary policy must, remain forward looking.

The rest of the minutes can be found here

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