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Low inflation figure defies slump in oil prices, pressure on naira

By BusinessNews Staff on November 17, 2014

Confronted with the interplay of forces, which include the tumbling price of crude oil; lull in the capital market and the attendant pressure on the naira; the increased political activities and the anticipated rise in cash flow in the system, it is not out of place for policy makers and members of the economic and business community to entertain fear over the health of the nation’s economy in the last quarter of the year.
It is under this frightening economic scenario that the Monetary Policy Committee of the Central Bank of Nigeria (CBN) is holding its last meeting next week to review and take some far-reaching decisions which analysts said should be fundamental enough to insulate the Nigerian economy from the brewing global economic crisis.
For economic watchers, who had expressed apprehension over the effect of the tumbling prices of oil on the nation’s economy, it was a great relief that the inflationary figure for the month of October, as released by the National Bureau of Statistics, showed a marginal fall to 8.1 per cent as against 8.3 per cent for September.

Inflation Rate
According to the NBS, Nigeria’s consumer price inflation eased for the second consecutive month to 8.1 per cent in October, from 8.3 per cent the previous month, driven by lower food prices, the statistics bureau said on Sunday.
Food prices, the biggest contributor to headline inflation, declined to 9.3 per cent last month, down from 9.7 per cent in the previous month.
“In October, the pace of increase in food prices eased for the second consecutive month, representing the lowest price increase since March, 2014. The highest price increases were recorded in the coffee, tea and cocoa; fish, dairy, and fruit groups,” the bureau of statistics said in a statement.
The bureau explained that consumer inflation rose from 8 per cent in May, creeping up from a five-year low of 7.8 per cent last October as food prices rose. The central bank has said it wants to maintain inflation within a target of between 6 to 9 per cent.
“Year-on-year, prices of food and non-alcoholic beverages rose 9.6 per cent, the same rate recorded in September while the food alone index increased at a slower 9.3 per cent in October (9.7 per cent in the previous month). Other downward contributions came from housing cost (went up 6.1 per cent following a 6.3 per cent increase in September), clothing and footwear (7.5 per cent from 7.7 per cent) and transport (6.7 per cent from 6.9 per cent).
“On a monthly basis, consumer prices decelerated marginally (0.51 per cent from 0.55 per cent in September). Food prices increased 0.5 per cent, down from 0.6 per cent in the previous month, with coffee, tea and cocoa; fish, dairy, and fruit recording the highest price increases. Nigerian annual inflation rate slowed slightly to 8.3 per cent in September of 2014 from 8.5 per cent in August, as food prices eased for the first time in six months.
“Prices of food and non-alcoholic beverages increased at a slower 9.6 per cent in September (9.95 per cent in August) while the food alone index rose 9.7 per cent (10 per cent in the previous month).
Additional downward pressures came from transport cost (up 6.9 per cent compared with a 7.3 per cent increase in August), housing (6.3 percent from 6.45 percent) and clothing and footwear (7.7 percent from 7.9 percent),” the report said.
It added that on a monthly basis, consumer prices rose at a faster 0.55 per cent, compared with a 0.48 per cent increase in August, driven by higher health, transport and recreation cost. Food prices increased 0.6 per cent, the same rate recorded in the previous month, with potatoes, yam, bread and cereals, meat and fruit recording the highest price increases.
“Urban prices have increased at the same pace for the previous three consecutive months: by 0.5 per cent while the pace of increases in the Rural All- items index eased, increasing by 0.5 per cent, down from 0.6 per cent in September,” the bureau said.
“The percentage change in the average composite CPI for the 12-month period ending in October over the average of the CPI for the previous 12-month period was recorded at 8.0 per cent, unchanged from rates recorded in September, while corresponding rural index was also unchanged in October increasing by 7.9 per cent,” it added.
The pace of increase in food prices, the bureau said, rose by 9.3 per cent, representing the lowest price increase since March this year.
The NBS, however, reported that the pace of increases in the “All Items Less Farm Produce” or Core index, which excludes the prices of volatile agricultural products, held firm for the third consecutive month in October, rising by 6.3 per cent year-on-year.
Many of those who expressed relief over the marginal fall in inflation rate for October said Nigerian economy seems to have a peculiarity that makes it record a moderate inflation figures in spite of the overwhelming threats to economic growth.

Beyond Economic Theories
One of those who shared these sentiments is Chief Executive, Global Analytics Consulting Limited, Tope Fasua, who observed that for inflation to be going down at a time people would expect it to rise as a result of political campaigns showed that the Nigerian economy has the capacity to defy conventional economic theories.
According to Fasua, the argument that increased spending during elections would raise inflation towards election was contestable, considering that the amount of money that would get to the average man on the streets would be insignificant to impact on his purchasing power.
Rather, he said the pressure would be much on the country’s foreign exchange end of things, in view of the fact that politicians would ultimately take the money outside the country, apart from the pressure on the economy as a result of the decline in crude oil prices at the international market.
Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said policy holders will not fold their hands because of the moderation in the October inflation rate. He believed that the falling oil prices and the attendant pressure on the naira are factors that have made it necessary for Nigerians to wait for more challenges especially in 2015.
He said by the time the effect of the current economic realities begin to show, inflation figure may hit 10 per cent next year.
Meanwhile, analysts from FBN Capital Nigeria expressed surprise at the fall in inflation rate. “Our expectation was an unchanged rate. Food inflation slowed significantly from 9.7 per cent to 9.3 per cent y/y while the core measure held firm for the third consecutive month at 6.3 per cent y/y. The NBS commentary on core inflation, while noting the unchanged rate, observed m/m increases in the prices of education, catering services and repair of household appliances.”
According to the research firm, “The CBN has achieved single-digit inflation since January 2013. This is the longest sequence since June 2006 to June 2008, which was driven by food price movements and when the NBS operated its previous index (with a higher weighting for food).
“The objective for 2014 is between 6 per cent and 9 per cent y/y, which in our view is attainable (just) provided that the CBN is able to hold the line on the naira exchange rate and that growing conditions for agriculture do not deteriorate.”

Further Tightening of Monetary Policy
The report noted that “Given the recent pressure on the naira, we see the MPC embarking on further tightening of the monetary stance. In September, five of the 12- members present voted for an increase in banks’ cash reserve requirement for private-sector deposits. Given warnings in the MPC communiqué about banks’ building of forex positions and their subdued risk appetite, we expect a sizeable increase in the private sector CRR.”
Meanwhile, analysts have said that a chain of factors which include the significant fall in oil prices, depletion of fiscal and external buffers; renewed speculative and fundamental currency pressure and high banking system liquidity have played up three scenarios that may feature at the all-important meeting.
In the first scenario, experts said the committee may maintain status quo on current monetary policy stance (with a 40 per cent probability).
A report contained in the Monthly Economic News and Views at Lagos Business School and which was delivered by the managing director, Financial Derivatives Company, Mr. Bismarck Rewane, on Friday said should the MPC maintain the status quo next week, the Nigeria Interbank Offered Rate (NIBOR) will remain low, while external reserves depletion will continue. The report also said that if this should happen, then Nigerians should expect naira depreciation to N175/$ at the interbank market.
According to the report, another scenario which may happen is for the MPC to tighten monetary policy (increase Cash Reserve Ratio on private sector to 18 per cent, while Cash Reserve Ratio for public sector could be moved from 75 per cent to 100 per cent, while exchange rate midpoint could be left at N155)- 50 per cent probability.
Should the committee adopt this policy, the report said there will be a temporary ease in currency pressure; slowdown in external reserves depletion; reduction in banking system liquidity and reduction in net interest margin and bank profitability.
However, another probability is a situation whereby the committee tightens monetary policy (increase CRR on private sector to 18 per cent, may move public sector CRR to 100 per cent, and move exchange rate band) – 10 per cent probability.
The immediate result of this measure, the report said, will be ease in currency pressure; slowdown in external reserves depletion; reduction in banking system liquidity and reduction in net interest margin and bank profitability.

[ThisDay]

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