Inflation persistence and what the Central Bank needs to do

I must begin by acknowledging an undeniable reality: the cost of living has been relentlessly surging and shows no signs of slowing down. Over the past weeks, I’ve engaged in numerous discussions with friends across the country, and it’s evident that the current situation raises genuine concerns. The rising fuel prices, a consequence of the government’s decision to end the subsidy programme, along with the increasing costs of essential groceries and general living expenses, are particularly noteworthy factors contributing to the challenges we face. As a result, I believe we have reached an inflection point where finding solutions becomes imperative.

Today, my pre-occupation is primarily on inflation. Currently, based on the latest data, inflation stands at an unacceptably high rate of 24.08%, and it urgently needs to be brought down. My remarks today will centre on the crucial steps required to steer inflation back to the desired target.

But let me start with some stark and uncomfortable facts. Reflecting on the events that have unfolded so far, it becomes evident that the Nigerian economy has faced a series of inflationary shocks. These shocks stem from various factors, such as the rise in prices of goods caused by supply bottlenecks resulting from the pandemic. Additionally, conflicts and widespread insecurity in food-producing regions have led to a reduction in the supply of agricultural products to the market. Furthermore, pressures on money supply and exchange rates have emerged as significant triggers for high inflationary trends.

These economic shocks are responsible for a large portion of Nigeria’s inflation and impose significant hardship, especially on those least able to meet the higher costs of essentials.

As far as inflation is concerned, it is difficult to state what would happen next as this remains uncertain, however, I hold the belief that the current outlook appears somewhat more pessimistic compared to the previous months. I also do possess valid reasons to anticipate an increase in inflation in the upcoming months to about 26%.

Absolutely true. When we look at the African landscape, it becomes evident that even with an inflation forecast of 26%, we find ourselves in a relatively favourable position when compared to countries like Ghana with a rate of 43.1%, Egypt at 36.5%, and Ethiopia at 31%.

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But I think it is fair to say that the focus should be on monitoring closely key indicators of potential inflation persistence. In my current view, I suggest directing significant attention to closely observing reasons for economic inactivity, thereby considering its influence on both the job market and the economy’s capacity for output. An interesting vantage point, which may be at odds with the opinion of other economists, requires a temporary reinstatement of the petrol subsidy. This proposition is a product of the continuous surge in petrol prices and foreign exchange rates, coupled with the harsh realities faced by Nigerians.

My current reading of indicators suggests that the raising of MPR to a total of 225 basis points has somewhat not made any impact on inflation. I view it as still ineffective in an absolute sense. I believe that monetary policy needs to be prudent and forward-looking, such that actions can be calibrated to have the appropriate impact on inflation. In doing this, the central bank should be prepared to deploy a range of supplementary measures when confronted with such persistent inflationary pressures.

While the conventional tenets of central banking advocate for a forceful adjustment of the policy rate over time to steer inflation back to the central bank’s desired long-term target and to anchor inflation expectations accordingly, I respectfully hold a differing viewpoint. I argue that the current perspective calls for a pause in policy rate hikes to meticulously evaluate the cumulative impact of these rate adjustments on both inflation and the broader economy. It is pertinent to acknowledge that several central banking institutions have already opted to temporarily halt their policy rate increases, opting instead to assess the ongoing repercussions on economic conditions. Notable examples include the Bank of Canada, and among emerging market economies, the Bank of Brazil, which has maintained an unchanged policy rate since 2022.

This prompts us to question whether the bank should extend its approach beyond mere rate hikes when tackling inflation. There exist several contributing approaches worthy of the bank’s consideration, some of which include a comprehensive and adaptive approach that involves fiscal policy coordination, supply-side reforms, exchange rate management, targeted price controls, supply chain optimisation, and prudent labour market policies.

Clear communication of its policy decisions by the Central Bank should also be given a high priority. This will facilitate well-informed decisions and minimise uncertainty, ultimately leading to an improved effectiveness of monetary policy.

Let me conclude by stating that the issue of high governance costs, including excessive salaries for public officials and duplicated administrative functions, possesses the potential to indirectly fuel inflation by way of overextended expenditures, fiscal constraints, skewed distribution of resources, and, notably, a decline in public confidence.

And I can assure you that an additional increase in interest rates is bound to present difficulties for households, this consideration holds merit. Nonetheless, with this concern brought to light, I hold a firm conviction that it remains essential for the central bank to carry out its responsibility of returning inflation to a reasonable target. However, this must be achieved through significantly more imaginative methods that are contextually aligned. While achieving a return to single-digit inflation might be ambitious, striving for a level under the 20% target would create a more favourable atmosphere of price stability, needed for economic prosperity.

Omeihe is the chair of African Studies at the British Academy of Management and serves as a Senior Economic Advisor at Marcel. He holds the position of Associate Professor at the University of the West of Scotland.