• Wednesday, February 28, 2024
businessday logo

BusinessDay

Rising inflation poses challenge to CBN

market setting_inflation_gdp

As the nation awaits the release of August inflation figure by the National Bureau of Statistics (NBS) next week, some analysts predict a continuation of the upward trend of the past five months, picking between 8.6 and 8.7 percent from the current 8.3 percent.

Should this happen, they say it might be an acid test for the Central Bank of Nigeria (CBN) as it nears the apex bank’s ceiling target of 9 percent for this year.

The implication, they say, is that Godwin Emefiele, CBN governor, will have to start thinking of ways to curtail the situation moving beyond the ceiling, with the possibility of further tightening in monetary policy rate (MPR) which has remained at 12 percent since 2011.

“Our forecast (for August) is that the CPI (year-on-year) will increase for the sixth consecutive month to 8.7 percent, from 8.3 percent in July. The price level is moving closer to the 9 percent ceiling of the CBN target for 2014,” says Bismarck Rewane, chief executive, Financial Derivatives Company (FDC).

Rewane says in the event that the inflation rate comes in as forecast, the rate of increase in the headline CPI will affect previous assumptions of members of the MPC and may prompt a change in policy stance.

“Likely responses to these creeping threats to inflation include increase in CRR on private sector deposit from 15 percent to 18 percent, increase in CRR on public sector deposit from 75 percent to 100 percent and increase in the monetary policy rate by 200-300bps from the current 12 percent p.a.,” he says.

Other analysts, such as Friday Ameh, an energy analyst, however, believe that CBN may not take hasty decision in increasing the rate, but possibly continue to study the situation, especially since the external reserve is at the comfortable level of $39.6 billion which can still defend the naira.

Ken Iwelumo, senior partner, CKX Partners Limited, is of the opinion that it is only natural for inflation to rise during periods of political instability and uncertainties.

“The military successes of Boko Haram and the scare caused by the Ebola outbreak have helped in the rise of inflation. I expect the CBN to keep monetary policy stable with a possible rise in interest rates in the near future. Inflation rates should go down once the Ebola crisis is resolved and the political will to fight Boko Haram appears,” Iwelumo says.

The increased Federal Government’s expenditure on security and fight against the Ebola virus, among other fiscal overdrive, have been identified as major contributory factors to the trend, which, the analysts say, will make life uncomfortable for ordinary Nigerians.

The spike in the consumer price level that will cause higher inflation will also be as a result of the lagged effect of naira depreciation in the forex markets, which has continued to widen the gap between the official and parallel market rate with the attendant round tripping.

Also, the analysts identify positive growth in money supply of 3.12 percent in July 2014 and the lower-than-expected agricultural output so far due to insurgency and unpredictable rainfalls as contributory factors to the possible rise in inflation.

Besides, the dwindling disposable income occasioned by expenditure on Ebola preventive measures such as sanitisers, they say, will make some of the household goods unaffordable for the common people should inflation continue its upward trend.

Rewane believes that in the event that the inflation rate rises to 8.7 percent, the market will price in the effect which will result in an increase in interbank rates.

“Notwithstanding, treasurers are likely to take a short position as the market remains square and tentative pending the September MPC meeting,” he says.

On the likely effect on the exchange rate, he says there will not be any major adjustment to the exchange rate band. Hence, it is anticipated that the naira will remain relatively stable as the CBN continues to defend the naira with the external reserves.

But Razia Khan, analyst at Standard Chartered Bank, London, has decried lack of integrity for data which had made measurement of growth difficult, saying they are working on deploying technology by Premise in some emerging markets, including Nigeria, to capture the monthly CPI survey.

“Geographic differences in real-time price trends can be mapped more easily, as can data on the availability of goods,” says Khan.

“This means suppliers can respond more quickly, potentially preventing damaging price hikes triggered by shortages. Market efficiency is enhanced. Many stand to gain from the welfare boost made possible by greater price transparency,” she says.

JOHN OMACHONU