The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is set to convene in two weeks for its periodic meeting. The notice of the meeting, released by the apex bank on its website, indicates that the 280th meeting of the MPC is scheduled to hold July 26 – 27, 2021, in Abuja.
The decisions taken at monetary policy committee meetings are not as important as the guidance. Decisions are based on historical indicators while guidance are a signpost to the future. The decision to maintain ‘status quo’ at the last MPC meeting in May was seen by some as a ritual, but economists were gladdened by the courage of the policymakers even though belated to adopt a reform oriented forex rate determination mechanism.
The de-layering of the multiple exchange rates system, which had bedeviled the Nigerian economy, had been a subject of controversy for a long period. Now that it appears settled analysts expect a crawling peg method and an increase in forex supply to ensure equilibrium in the market.
Read also: CBN pumps N1.5tn into power sector in 7 years – Report
That notwithstanding, the CBN’s attempt to mop up excess liquidity has served as a temporary antidote to consumer price inflation, which has further declined to 17.75 percent in the month of June from 17.93 percent recorded in the month of May 2021, representing the third consecutive decline in headline inflation for the year.
Many local economists had projected that Nigeria’s inflation rate would pick up its upward trend in June, but instead, the growth of inflation rate has continued to dip further.
Consensus view of economists compiled by Bloomberg forecast was an inflation rate of 18.8 percent. The variance between forecasts and the published data can be explained by inflation expectations and the possible underestimation of consumer resistance to price increases. Most analysts’ expectations were anchored on the view that the major causes of inflation remain entrenched.
According to the latest consumer price index report released by the National Bureau of Statistics (NBS), the food inflation stood at 21.83 percent in June 2021 compared with 22.28 percent in May 2021, while core inflation that excludes the prices of volatile agricultural produce dropped from 13.15 percent recorded in May 2021 to 13.09 percent in the review period.
On a month-on-month basis, the Headline index increased by 1.06 percent in June 2021. This is 0.05 percent points higher than the rate recorded in May 2021 (1.01%).
The urban inflation rate increased by 18.35 percent (year-on-year) in June 2021 from 18.51 percent recorded in May 2021, while the rural inflation rate increased by 17.16 percent in June 2021 from 17.36 percent in May 2021.
The closely watched food inflation index slowed down again in the month of June to 21.83 percent from 22.28 percent recorded in the previous month. This also represents the third consecutive decline in the food inflation rate.
On a month-on-month basis, the food sub-index increased by 1.11 percent in June 2021, up by 0.06 percent points from 1.05 percent recorded in May 2021.
Also, the average annual rate of change of the Food sub-index for the 12-month period ending June 2021 over the previous 12-month average was 19.72 percent.
The rise in the food index was attributed to increases in the prices of bread and cereals, potatoes, yam and other tubers, milk, cheese and eggs, fish, soft drinks, vegetables, oils and fats, and meat.
The ”All items less farm produce” or Core inflation, which excludes the prices of volatile agricultural produce stood at 13.09 percent in June 2021, down by 0.06 percent when compared with 13.15 percent recorded in May 2021.
On a month-on-month basis, the core sub-index increased by 0.81 percent in June 2021. This was down by 0.43 percent when compared with 1.24 percent recorded in May 2021.
The highest increases were recorded in prices of garments, passenger travel by air and by road, motor cars and vehicle spare parts, shoes and other footwear, pharmaceutical products, medical services.
Others include hairdressing salons and personal grooming establishments, cleaning, repair and hire of clothing, clothing materials, other articles of clothing and clothing accessories, furniture and furnishing and fuels and lubricants for personal transport equipment.
In the month of June 2021, all items inflation on year-on-year basis recorded the slowest rise in Cross River (15.53%), Delta (15.18%), and Abuja (15.15%), while food inflation recorded the slowest rise in Bauchi (18.97%), Rivers (18.92%) and Abuja (17.09%).
Some sceptical analysts have questioned the basis for a decline in the rate of inflation at a time when global food prices and other causative factors of inflation were moving in the opposite direction. One of the key catalysts of price inflation in Nigeria has been the pass-through effect of exchange rate adjustments on domestic prices.
The CEO of EUA Intelligence, Emeka Ucheaga, stated, “As we go further into the year, the impact of the exchange rate would begin to dwindle and get slower,” also stating that one major reason for the recent drop in inflation is actually as a result of the ‘Base effect’. “However, inflation is most likely going to remain in double digit territory,” he said.
Inflation would continue to remain at double digit, but as we go further into the year (like in Q4), without another devaluation we could probably see inflation below 15%
perfect year-on-year. At the moment, it is most unlikely to see another devaluation cosidering the current position of crude oil prices this year.
However, the chance of a single digit inflation rate is most unlikely as food inflation still hovers around the 20 percent threshold largely due to food insecurity in the Northern region of the country..
“I think inflation would continue to trend lower until it gets to 15% by November and a change in the trend (rise) by December as a result of the festive season impact,” Ucheaga stated.
One major factor that has contributed to this decline in exchange rate could be traced to the devaluation that was experienced in the middle of last year (mid-2020). The impact felt in the first half of the year emanated as a result of the devaluation of the naira from N305 to N380.
However, the impact is currently wearing off as a result of the time-lag effect and also the recent price stability of the naira within the N360- N375 threshold. Thus, by mid-2021, the year-on-year base effect would be N360-N380 and that would dampen the impact and subsequently lead to a decline on inflationary impact by H2.
On this note, the next MPC meeting is most likely going to end with the decision to hold the ‘status quo’ (all parameters held constant), considering that their current policy decision currently yields positive gains on the back of the consecutive inflationary rate decline, which has been the bane of MPC discussions since the commencement of the year.
“I think the MPC would wait for economic growth performance before raising interest rate, considering that their policy is currently working well as the economy is seeing a gradual recovery and an easing in inflationary figures which would generate benefits for the country. Hence, on that note, the most likely decision would be to Hold all parameters,” Ucheaga said.
