The Central Bank of Nigeria (CBN) is expected to raise its key interest rate later this month as the country’s headline inflation quickened to its highest level since September 2005.
The National Bureau of Statistics (NBS) announced on Thursday that the inflation rate quickened to 20.52 percent in August from 19.64 percent in the previous month.
On a month-on-month basis, headline inflation decreased to 1.77 percent in August from 1.82 percent in the previous month.
Food inflation increased to 23.12 percent in August from 22.03 percent in July on a year-on-year basis. However, the rate of increase slowed on a month-on-month basis from 2.04 percent in July to 1.98 percent in August.
“The highest increases were recorded in prices of gas, liquid fuel, solid fuel, passenger transport by road, passenger transport by air, fuel and lubricants for personal transport equipment, cleaning, repair and hire of clothing,” the NBS said.
The CBN raised the Monetary Policy Rate (MPR), benchmark interest rate, by 250 basis points from 11.5 percent to 14 percent between April and July this year to tame the surging inflation caused by exchange rate illiquidity and rising energy cost caused by the Russia-Ukraine crisis.
Some analysts expect the CBN to respond to the further increase in inflation rate with another rate hike in its next meeting this month.
Capital Economics, a London-based economic research firm, holds the views that CBN could increase the MPR by additional 50 basis points.
“Nigeria’s headline inflation rate surpassed 20 percent y/y for the first time in 17 years in August and we think that this will prompt the central bank to respond with a 50bp increase to its benchmark interest rate, to 14.50 percent, later this month. But with inflation close to a peak and elections in early 2023 coming into view, further monetary tightening beyond September seems unlikely,” Capital Economics said.
United Capital, a financial and investment group, predicted a few weeks ago that the current environment could lead to a hike in MPR.
“A continued uptick in inflation could lead to another rate hike in MPR, which poses some headwinds to a fragile economy such as Nigeria,” the company said.
The firm advised the CBN to be cautious when balancing the scales between moderate economic recovery and rising inflation.
Another investment firm, Cardinal Stone, said in its August inflation report that the CBN could continue its hawkish stance in order to tame inflation.
“In our view, CBN may continue to signal a hawkish stance to rein in inflation. However, this may be insufficient to curb the current trend, as most driving factors are largely structural and unresponsive to monetary policy changes,” the firm said.
Bolawon Ologunro, senior research analyst at Cordros Securities said: “We should expect another 50 bps increase from MPC, and will be consistent with the CBN forward guidance they released last month.”
On the contrary, Ibrahim Tajudeen, head of research at Chapelhill Denham, said the Monetary Policy Committee (MPC) will hold the current rate for now in spite of inflation rising further in August.
“I think MPC would probably skip September for a rate hike and wait to see what food inflation for September and October will be like before contemplating if a further rate hike will be necessary,” Tajudeen said.
He noted that in August, inflation rate reduced on a month-on-month basis, indicating the nation is approaching the harvesting season when food items are always cheaper.
“If food harvest for September and October is good, inflation will start to fall,” Tajudeen added.
Analysts at Financial Derivatives Company Limited (FDC) said in their latest economic bulletin that the CBN will hold MPR at the current level.
“In spite of a rise in inflation, MPC is not likely to increase rates at their next meeting this month,” the FDC said, adding that CBN could reduce the rising interest rate by mopping up liquidity in the financial sector through the introduction of special treasury bills to the Nigerian banks.