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Naira volatility threatens single-digit inflation

By on March 20, 2014

The persistent pressure faced by the naira in recent time may destroy the single-digit inflation achieved by the country since last year, a report has stated.
The report by Standard Bank’s Emerging Market Strategist, Mr. Samir Gadio pointed out that the upside risks to Nigeria’s single-digit inflation stem from a potential re-adjustment of the mid-point (N155/$1) at the Retail Dutch Auction System (RDAS) forex band coupled with an increase in the interbank dollar versus naira rate.
Furthermore, it predicated that a fiscal expansion ahead of the 2015 elections, as well as a less likely shift towards a more accommodative monetary stance may affect the sustenance of single digit inflation in the country.
Inflation in Nigeria dropped to 7.7 per cent year-on-year in February 2014, from eight per cent year-on-year in January and December 2013, which represents the lowest figure since 2007.
But the report forecast that inflation would remain in single-digits in the medium term and may well stabilise at seven per cent in the first half of 2014, before edging up moderately in the second half of 2014.
“The modest drop in the February inflation figure is unlikely to intrinsically affect the yield curve, as has been the case over the past year, especially considering the bearish positioning in the Nigerian market.
“In fact, rates have actually backed up in recent weeks as foreign investors exited Nigeria and domestic accounts pushed up yields, especially at the short end (364-day Treasury-bill yield up to 15.6 per cent on 17 March),” it added.
It pointed out that there is the likelihood that te Monetary Policy Committee which meets next Monday may tighten monetary and liquidity conditions further to slow the erosion of the external reserves.

 

 

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