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Economists warn of higher inflation

By on July 20, 2015

The persistent rise in inflation rate for six successive months in Nigeria calls for a reduction in the Monetary Policy Rate, otherwise called interest rates, economists have advised the Central Bank of Nigeria.

According to them, the increasing inflationary trend may extend to the third quarter of 2015, going by the economic realities prevalent in the country.

Economists at Financial Derivative Company Limited as well as those at the First Bank of Nigeria Capital Research, in separate reports made available to our correspondent, explained that Nigeria’s inflation for the month of June 2015 was now above the upper limit of the CBN acceptable band of six to nine per cent.

Nigeria’s minimum interest rate, according to the Monetary Policy Committee of the CBN, is 13 per cent. The Deposit Money Banks and other financial institutions, however, fix competitive rates based on the apex bank’s MPR.

The FDC Economic Team specifically noted that the consistent rise in inflation was fuelling fears among consumers, and that its persistence might make the Nigeria Labour Congress to intensify its demand for an increase in the national minimum wage.

Last week, the National Bureau of Statistics released the official inflation rate for June 2015, which was put at 9.2 per cent.

The consensus view of most economists polled by Bloomberg was at 9.1 to 9.2 per cent. The price level released by the NBS is now above the upper limit of the CBN acceptable band of six to nine per cent.

The FDC team said, “Ordinarily, this increase should send a warning signal to the Monetary Policy Committee about the need to tighten further.

However, since monetary conditions are already constraining economic activities, monetary policy is expected to now go countercyclical. In other words, interest rates should actually be reduced.

The inflation risk is already priced into the market, and the CBN may consider a symbolic cut in interest rates to stimulate economic activity.”

The MPC is expected to meet on the 23 and 24 of this month.

The NBS had explained that the increase in June’s inflation rate was driven by fuel scarcity, higher transportation costs and an increase in food prices.

But reacting to the inflationary trend, the FDC economists said, “Even though we believe that the rising inflation is probably aberrational, the trend is becoming more consistent, and is thereby fuelling the fear factor.”

They noted that anticipated inflation was more important than historical inflation because it influences consumer behaviour and preferences.

The team said, “Demand for goods will increase if people expect prices to rise in the near future. As demand increases, producers will be forced to increase prices up to a point that there is a struggle of bargaining power. At this level, it is the price elasticity of demand that determines if there will be a further increase in prices.

“Another threat to inflation is the possibility and timing of the subsidy removal, which is now becoming more inevitable.”

The FDC economists noted that with “the recent calls for an upward review of the minimum wage of N18,000, the NLC might intensify its demand for an increase in the national minimum wage due to the persistent inflation.

“We believe that the increasing inflationary trend is likely to extend to Q3. Besides the fuel scarcity problem that still lingers, albeit lightly, there has been sustained attacks from Boko Haram insurgents in the North-East, where many farm products (especially perishables) are cultivated.

“Furthermore, the aftershock of the CBN’s restriction of importers’ access to foreign exchange at the interbank market would be felt in the coming months. We are already at the upper limit of the tightening cycle, and the more probable outcome at the MPC meeting would be for the CBN to maintain the status quo and use more administrative measures in its quest to protect the naira in the forex markets.”

In their analysis, the FBN Capital Research team observed that the headline inflation in June picked up from nine per cent year-on-year to 9.2 per cent, adding that the core measure rose from 8.3 per cent year-on-year in May to 8.4 per cent.

They explained that food price inflation accelerated from 9.8 per cent year-on-year to 10 per cent.

The team said, “We see the impact of the weaker currency on the core measure, suggesting that importers are gradually passing their higher costs onto consumers.

“Headline inflation is now above the top of the CBN/MPC range of between six and nine per cent. This would normally be grounds for monetary tightening, particularly as core inflation has increased for six successive months. The MPC next meets on 23 and 24 July. We would not be surprised if it holds fire on both the policy rate and the naira exchange rate.”

 

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