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Inflation may rise to 10% before September — Rewane

By BusinessNews Staff on June 19, 2014

The national headline inflation may increase from the current rate of eight per cent to 10 per cent within three months if nothing is done about the impact of emerging inflationary threats, the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, has said.

According to the economist, inflation is likely to spike between the second and third quarter.

He noted that the correlation between the research firm’s urban inflation and the national headline, being 0.81, informed the use of urban inflation as a proxy for the headline inflation.

“Based on this correlation, the national headline inflation is expected to increase from the current rate of eight per cent to about 10 per cent in the near term,” Rewane added.

The FDC boss, in his weekly bulletin, noted that the headline inflation had been within the Central Bank of Nigeria’s target of six to nine per cent in 2014.

He, however, maintained that the research firm anticipated resurgence in the year-on-year inflation in the next few months due to emerging inflationary threats.

Rewane gave reasons for the prediction to include: the increase in prices of new cars; disbursement of capital vote (fiscal overdrive); steady growth in money supply (5.83 per cent annualised in April); and resurgence in currency pressures.

He said, “Inflation gap, the difference between money supply growth and real Gross Domestic Product growth measures the level of anticipated inflation. Nigeria’s inflation gap in negative territory indicates that there is no immediate threat to inflation.

“However, recent growth in money supply at an annualised rate of 5.81 per cent puts the inflation gap at –1.6 per cent, compared to March’s annualised M2 growth rate of –13.42 per cent with an inflation gap of –20.83 per cent. Real GDP growth in 2013 was 7.41 per cent. The change in the inflation gap is an indication that inflationary pressures are getting stronger.”

The inflation numbers are consistent with the CBN Governor, Mr. Godwin Emefiele’s monetary policy agenda.

The analyst recalled that Emefiele had said the CBN would pursue exchange rate and price stability as well as a gradual reduction in interest rates.

Consequently, he said the monetary policy stance was unlikely to change barring any significant movement in consumer prices and the macroeconomic environment.

He however added, “The continuous depletion of the foreign reserves will further reduce the CBN’s capacity to defend the naira. We estimate that the naira will trade within N163.5-165 against the dollar in the coming month.

“A spike in inflation against the CBN’s projection will suggest further monetary policy tightening which will push nominal interest rates as well as stock prices up and consequently stock returns downwards.”have been excluded in the formal financial system.”

He also said that a predominantly cash-based economy was not good for the system, noting that the corporation was in full support of the Central Bank of Nigeria’s cash-less policy.

“The NDIC as a deposit insurer provides a unique role of enhancing financial inclusion by encouraging mobile financial services. There is a link between deposit insurance system and financial inclusion.

“Deposit insurance is vital to financial inclusion because the poor need assurance that their deposits are safe and available at all times they have a need for them.”

[Punch]

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