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The
Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) yesterday
raised its policy rate by 25 basis points from 6.25 per cent to 6.5per
cent with immediate effect.

It
also said that inflation risk as a major concern cannot be ignored in
the short-to-medium-term, particularly against prospects of increased
liquidity as a result of the likely increase in government spending in
the run up to the April elections, as well as purchase by the Asset
Management Company of Nigeria (AMCON). The MPC described as
unsustainable the existing subsidy regime on petroleum products in view
of government’s current poor finance.

Sanusi
Lamido Sanusi, the CBN governor, in a communiqué at the end of a
two-day meeting in Abuja, said the decision by the 12-member committee
received a majority vote of 11 to one, as a demonstration of its
commitment to maintain price stability by pursuing a tight monetary
policy in the face of perceived inflation risks in the near future.

At
its previous meeting held November last year, the committee resolved to
retain the rate at 6.25 per cent fixed during its earlier meeting,
underscoring the need to retain flexibility and allow the effect of the
previous rate increase from 6 per cent to work through the system.

Similarly,
the committee resolved to raise the Cash Reserve Requirement (CRR)
ratio by 100 basis points from one per cent to two per cent with effect
from February 1, while the Liquidity Ratio (LR) would be raised by 500
basis points from 25 per cent to 30 per cent with effect from March 1.

Though
the CBN governor noted the economy growth and the continual recovery of
the capital market, and the progress towards restoring stability in the
banking sector, he reiterated the need for government to further
strengthen and deepen economic and structural reforms to redress the
challenge of continued high inflation.

‘Restrain’ is the word

Mr.
Sanusi regrets that despite improved supply of petroleum products and
lower growth in monetary aggregates, the downward trend towards a
single digit benchmark inflation level was not achieved in 2010,
pointing out that this underscores the need to address both
supply/demand side factors that determine the country’s inflation
dynamics.

“One
of the ways to keep aggregate demand in check is to restrain
debt-financed government spending in the medium-term. This calls for a
review of subsidies and other recurrent expenditure categories that
constitute a drain on the national budget as well as improving the
revenue base,” he said.

Though
the committee commended the government for its emphasis on capital
expenditure and infrastructure development in this year’s budget, it
observed that allowing recurrent expenditure at over 70 per cent of the
total budget remained high, pointing out that the risk posed to price
stability by fiscal operations must be constantly monitored to bring
inflation down to single digit levels in the short to medium term.

Rather
than continue to spend huge foreign exchange on petroleum subsidies as
well as importation of food items such as rice, the committee
emphasised the need for government to implement policies that will lead
to food security and total self sufficiency.

“Implementation of these reforms along with the improved outlook for
oil price and output should go a long way in reversing the negative
trend in our foreign reserves, which stood at $32.32 billion as at
end-December 2010, before rising to $33.26 billion as at 20January 20,”
the committee further said.