BusinessDay

Russia-Ukraine conflict adds to MPC’s inflation headache

The inflationary pressures brought on by the Russia-Ukraine war is expected to dominate the personal statements of members of the Monetary Policy Committee (MPC) at their next meeting.

The MPC, chaired by Godwin Emefiele, governor of the Central Bank of Nigeria, will meet next week to decide on the flow of credit to the economy amid rising global inflation.

At its meeting in January, the members voted unanimously to maintain the monetary policy rate at 11.5 percent and keep all other parameters unchanged, due to weak growth and inflation concerns.

“It’s difficult to gauge the trajectory of inflation in Nigeria in the best of times – and the war in Ukraine further complicates such efforts.

As we have noted before, while Nigeria is a big wheat importer, it’s not particularly reliant on Russia. Even so, a rise in food inflation, at least temporarily, seems likely over the coming months,” said Virag Forizs, emerging markets economist at London-based Capital Economics.

“This will bump up headline inflation rates as well, given the large weight of food in the CPI basket. While we don’t think that an interest rate hike is imminent, pressure on the central bank to tighten monetary policy will certainly build,” she added.

Ahead of the release of inflation numbers by the National Bureau of Statistics (NBS), on Tuesday, analysts expect acceleration in consumer prices.

Nigeria has been battling a high double-digit inflation since the second quarter of 2021, following the impact of COVID-19 pandemic. The inflation rate dropped from 18.17 percent in March 2021 to 15.60 percent in January this year.

“While headline inflation declined by 3bps in January, we forecast an increase in February, owing to rising energy costs due to the issues around the scarcity of premium motor spirit (petrol),” analysts at FBNQuest said in a new note.

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The ongoing conflict between Russia and Ukraine, which has put upward pressure on global energy and commodity prices, will inevitably feed into the inflation basket, complicating the MPC’s decision at its meeting later this month, the analysts said.

According to them, there may be a gradual shift in the position of some members, particularly if there is an uptick in February’s headline inflation reading.

Adeola Adenikinju, one of the members of the MPC, noted at the last meeting that there were still many uncertainties within and outside the domestic economy.

“Economic growth remains very fragile. While inflation ticked up marginally in December 2021, it is too soon to tell whether it is a trend or a blip.

Hence, the next few months remain very important. We must protect the current growth trajectory to reduce socio-economic problems in the country,” Adenikinju said.

MPC members at the last meeting emphasised the risks posed to developing economies by monetary policy normalisation in advanced economies, including capital flow volatility, exchange rate pressures, and rising borrowing costs on the international debt market.

One member noted that while global trade had picked up, especially for goods trade, services trade remained subdued as some restrictions to movement remained in place in certain jurisdictions.

“The Russian invasion of Ukraine has profound and multidimensional implications for the Nigerian economy, especially if it gets protracted,” Muda Yusuf, CEO of Centre for the Promotion of Private Enterprise, said.

According to him, these include the escalation of energy prices (diesel, aviation fuel, kerosene and gas), mounting petrol import and subsidy bill and the aggravation of petrol smuggling.

“There are also significant macroeconomic outcomes, which include heightening fiscal deficit, growing debt levels, spike in debt service payments, money supply growth, exchange rate depreciation and more intense inflationary pressures,” he added.