In spite of the Central Bank of Nigeria’s (CBN’s) deployment of fiscal policy instruments of adjusting government spending levels and tax rates to influence the nation’s economy, inflation appears to be on the upward swing.
Analysts are already predicting that Nigeria’s January inflation could inch up to 8.2 percent from 8 percent in December, as recent devaluation of the naira, as well as, rising food prices from the North-Eastern part of the country were weighing on the economy.
The National Bureau of Statistics is expected to release January inflation numbers in a matter of days, precisely on the January 17, as stated in its data release calendar.
But, Access Bank’s economic Intelligence Report released, yesterday, stated that higher consumer prices for January could have been driven largely by higher food prices from the North-Eastern part of the country, due to rising input prices factor, and the continued unrest in the region. This, they say, would see some reductions in farm produce supplies.
Another headwind is the upswing in systemic liquidity in the run-up to the now postponed 2015 general elections.
“Consequently, we forecast a rise in the inflation rate to 8.2% in January 2015 from 8% in December 2014,” notes the intelligence unit in a mailed report on Wednesday.
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It explained that the CBN’s tight monetary policy stance and impact of naira devaluation on imported items could have begun to weigh on consumer prices.
According to the report, “the Central Bank’s tight monetary policy stance and impact of imported inflation arising from naira devaluation are contributory factors to this month’s inflation forecast. Particularly, we expect a 6.8% rise in core inflation, quicker than 6.2% seen in December.”
Access Bank adopted an autoregressive analysis methodology of past prices, recognising all the assumptions used by the National Bureau of Statistics (NBS) in its computation of monthly composite consumer price index (CCPI).
The higher inflation would affect market real rates, while yields go on the increase on higher inflation, the report anticipates. High inflation, partly due to excess systemic liquidity may cause interbank rates to go southwards.
The report hints that there could also be further pressure on the local currency as investors dump naira denominated investment as currency substitution, stating that, preference for dollar savings may heighten, as a hedge against inflation
As a policy response, the report advised that the Central Bank could consider further tightening of its monetary policy stance, raising the monetary policy rate slightly up to 13.5 or 14% levels that may not be out of range.
There is also the possibility that the monetary regulator could concurrently or alternatively mop up excess liquidity in the system, using either or both of the cash reserve ratios and the open market operations (OMO).
“Our take is that the CBN is unlikely to increase the benchmark interest rate as a hike could amount to further perplexing already stretched input prices,” the report noted.
Headline inflation at end-December 2014 moderated to 8 percent, moving upwards from 7.9 percent the previous month, but was within the CBN’s 6.0 to 9.0 percent benchmark range for inflation.
“The December inflation reflected a reduction in core inflation and seasonal factors related to the Yuletide celebrations, as well as, the stabilization in food prices,” Godwin Emefiele, CBN governor, said at the end of Monetary Policy Committee meeting in January.
But he raised concerns on some upside risks to inflation in the near-term, including the likely higher import prices on the strength of an appreciating dollar and possible food supply bottlenecks linked to insurgency and insecurity in some major agricultural zones of the country.
His worry was also about the recurring challenge of excess liquidity in the banking system and the possible complications arising from capital flow reversal, as well as, the demand pressure in the foreign exchange market.
However, in-spite of all these, the National Bureau of Statistics foresees the country’s inflation staying in single digit – precisely 8.8 percent in 2015 even as pressure continues to mount on the naira. The NBS also sees prices remaining moderately stable over three year period to 2017, with inflation averaging 8.13 percent.
The bureau is also confident that the pressure on inflation rates are likely to be caused by the recent depreciation of the naira, and not increased spending during the election period as widely speculated.
Onyinye Nwachukwu
