It is now three years since the Central Bank of Nigeria (CBN) announced that it plans to contain inflationary pressures in the economy and bring inflation back to a single digit within a target range of 6-9 percent.
However, since inflation doubled from 9.5 percent in 2015 to 18.5 percent in 2016, CBN has attempted to use a contractionary policy strategy to reduce it to single digit, which till date is yet to occur.
The monetary contraction strategy has brought some benefits though. Since CBN raised interest rate in July 2016, inflation has dropped from 17.1 percent in July 2016 to 11.2 percent in March 2019. The performance looks good until you realise that inflation has been stuck within the 11-11.5 percent range since June last year (that’s now 10 months and counting).
Analysts now wonder if the inflation will remain stuck at 11+percent for the next few months with many waving off the possibility that inflation will return to single digit anytime this year.
Obinna Uzoma, a Lagos-based economist, told BusinessDay, “The single digit target seems like a far cry given current economic realities. In fact, there is a higher likelihood for inflation to trend higher than lower given that we may see the effect of the increase in minimum wage kick in soon.”
“Forget CBN inflation forecasts,” he said, “they hardly ever get it right anyway.” Analysis of CBN inflation forecasts over the years shows that CBN has struggled for years to accurately forecast inflation over the next period, in fact, the performance has been very woeful.
Based on data compiled from CBN Statistical Bulletin, the difference between the CBN inflation target and actual inflation in Nigeria exceeded 100 basis points in 19 out of 23 observations between the years 1995 and 2018, translating to 82.6 percent chance that CBN will fail to achieve its monetary inflation target annually.
The only years the CBN was spot on in its inflation forecasts were 2004, 2006, 2010 and 2014, when the difference between CBN target inflation and actual inflation was 0.01 percent, 0.45 percent, 0.6 percent and 0.48 percent, respectively.
When asked why CBN still make inflation forecasts if it is going to be wrong, Uzoma responded saying, “They wouldn’t be doing their job if they didn’t. CBN needs to have an inflation target that it is trying to achieve to guide monetary policy decisions”.
“If they left it open without an anchor, any inflation performance may look like the right one. Even though the goal is to achieve the inflation target, it could take months or even years for the target to be achieved especially when the economic environment is very unstable.”
Nigerians will be watching closely to see if CBN achieves its policy reference target of 6-9 percent. With prices still rising at double-digit rate in the country, the cost of doing business as well as the cost of living continues to increase rapidly after year. While the country will be hoping that inflation level trends lower in the coming months, economists say the interest rate cut from 14 percent to 13.5 percent by CBN last month wouldn’t lend a helping hand to that cause.
