CBN’s tight monetary policy no remedy for cost push inflation – KPMG

The further interest rate hikes may not be the best approach for moderating Nigeria’s inflation, professional services company, KPMG Nigeria has said.

In a flashnote published April 16, 2023, the company said the further monetary policy tightening to control money supply might have more negative than positive impact. According to KPMG, it will squeeze economic growth, constrain non-oil export growth, and slow down employment creation rather than slow down inflation.

“The reversal of inflation in March after a seeming slowdown in February, reinforces our view that the determinants of inflation in Nigeria are largely cost push factors which are out of control of monetary authorities,” KPMG Nigeria said.

Nigeria’s current inflation rate rose to 22.04 percent in March from 21.91 percent in February, according to the latest inflation report released on Saturday.

“Yearly and monthly core inflation had slowed in February in addition to significant slowdown in monthly headline and food inflation in February, prompting many analysts to opine due to the sudden substantial pressure the platform and systems had to face with the surge in transaction,” the consulting firm said.

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KPMG Nigeria noted that both volume and value of mobile banking transactions more than doubled between the periods before and after the naira design policy just as the number of payment companies, digital banks and POS terminals deployed have grown to record highs by end of March.

“It appears that the gradual improvement in the availability of cash and boost in electronic transactions together with the CBN tightening stance has not yet eased pressure on food and especially energy, transport, and distribution prices.

“Rising energy, fuel, transport, and related costs were largely responsible for the surge in core inflation in March 2023. Furthermore, the depreciation of the naira against the dollar during the month in question has also put pressure on domestic prices despite generally,” the consulting firm said.

KPMG Nigeria said “a strategy to cut production costs and boost supply and control conditions stifling distribution and responsible for high and rising energy and transportation costs might be more effective in controlling consumer inflation, though we expect the CBN will choose to continue monetary policy tightening for now.

“Additionally, this trend might have also encouraged the Central Bank of Nigeria ICBN) to ease the pace of its recent aggressive tightening stance at its last MPC meeting in March 2023.”

“We had however cautioned that the slowdown was more likely a blip and we expected the trend of a generally high and rising trend in inflation to persist for most of 2023,” it said.

“We therefore reiterate our position of a high and generally rising CPI in 2023 at least until we begin to see significant and consistent signs of slowing domestic transportation and distribution prices and domestic and international commodity and energy prices as well as a gradual return to normalcy in economic activity following the cash crunch experienced in 01 2023.

KPMG Nigeria further said that following the CBN’s policy reversal to allow old naira notes to persist alongside the new notes, currency in circulation had dropped from N28 trillion in December 2022 to N82 billion in February 2023.

It noted that the rise in currency in circulation has thereby improved the cost of cash and stimulating economic activity, by boosting available cash to purchase inputs, increasing supply, and stimulating demand.

“At the same time, many economic transactions gradually shifted to electronic payment channels despite initial challenges creating consumer demand and worsening poverty, rather than slowing down inflation.”

KPMG Nigeria said at this point, a strategy to cut production costs and boost supply and control conditions stifling distribution and responsible for high and rising energy and transportation costs might be more effective in controlling consumer inflation.