Disinflation: Nigeria’s Monetary Authority to Keep Key Rates Steady
A five basis slides in inflation rate reading -disinflation- in April 2021 has provided Nigeria’s monetary policy authority to keep key rates steady next week, analysts have predicted.
If the monetary policy rate is adjusted upward, lending rate to the real sector of the economy will rise and growth expectation may be impacted as companies made adjustment around increased cost, especially with high double digit inflation rate condition in Nigeria.
Analysts had predicted that Nigeria’s gross domestic products (GDP) numbers for the first quarter in the fiscal year 2021 outturn will determine the monetary authority committee voting pattern after the disinflation record in April provides a tenable alibi, supporting the apex bank supply shock claim.
On Monday, the National Bureau of Statistics (NBS) is expected to release a new figure on GDP performance for the first quarter of the year. Recalled that Nigeria’s lost about 2% of its economic size in 2020 due to coronavirus pandemic-induced economic and productivity stress, with GDP printed at $486 billion.
Now, Q1-2021 GDP growth rate came weak, rising 0.51% amidst the International Monetary Fund’s 2.5% growth rate projection for Nigeria in 2021. The CBN has remain pro-growth which makes benchmark rate hike unlike given that inflation made a reverse in April.
The latest unemployment figure from the Bureau of Statistics put joblessness in the country at 33.3% of the entire labour force, youth unemployment accounts for a large chunk amidst a steep inflation rate.
In the month of April, there was a momentary disinflationary experience which analysts have attributed to slow demand arising from the Ramadan period.
Recall, Godwin Emefiele, the Governor at the Nigerian central bank insisted at the monetary policy committee meeting held in March that supply chain disruption drives inflation rate uptrend.
The CBN government attributed the 19 consecutive rise in headline inflation to a shock experience in 2020 due to economic lockdown. However, of note is insecurities condition in the country which came at the time when some farmers who access the apex bank anchored borrowers program experience flood.
This had resulted in low output, and while the economy was healing from the poor agricultural output, the pandemic hit just at the time when the government locked land borders.
A possible hike in benchmark interest rate is unlikely as it could impact the Central Bank’s accommodative stance amidst pressure on the foreign currency inflows. The Emefiele’s led CBN has maintained policies support targeted at reflation the performance of the economy as part of its efforts to support the government, drive inclusive growth.
But, the policy committee voting pattern in their meeting in March 2021 pointed to a different direction as increased numbers of members voted for key rates adjustment.
According to the Consumer Price Index (CPI) report for April 2021 published by the NBS, Nigeria’s headline inflation rate fell for the first time in twenty months to 18.12% in March.
On month on month basis, the index also fell 59 basis points to 1.0%, making it the sharpest month-on-month decline since June 2016. The decline in the headline inflation rate was mainly driven by the Food inflation rate sub-component which also fell both year-on-year and month-on-month in April 2021.
Specifically, the Food inflation index which accounted for 50.7% of the total CPI weighted basket fell 23bps to 22.7% and 91bps month on month to 1.0%. “This trend on the surface suggests a modest decline in the average price of food items in April 2021 compared to the preceding month”, Afrinvest said in a report.
However, the firm said a close evaluation of the data suggests that the decline could partly be attributed to the base year effect, given the 24bps month-on-month surge in food inflation rate post-COVID-19 induced lockdown in April 2020.
On the other hand, the Core inflation rate rose for the fifth consecutive month by 7 basis points to 12.7% but declined 8bps month on month for the third successive months to 1.0%.
“We believe the year on year increase was in reflection of the twin devaluation of the official exchange rate in April (to N360/$1 from N306/$1) and August (to N379/$1 from N360/$1) of 2020, while the month on month decline was due to the relative stability in the FX market in April 2021, buoyed by CBN’s resumption of dollar sales to BDC and SMIS operators”, Afrinvest said.
Meanwhile, the CBN’s bi-monthly Monetary Policy Committee (MPC) meeting for the month of May 2021 is scheduled to hold next week – Monday 24th & Tuesday 25th.
Ahead of the MPC meeting, Afrinvest expresses a view that the new inflation numbers will impact the voting pattern of the committee.
The firm noted that at the last meeting held in March 2021, the persistent surge in the domestic inflation rate and its impact on the broader economy was the biggest concern of the committee relative to other identified risk factors.
In the end, the committee decided by a vote of 3 (increase) to 6 (retain) to retain all monetary policy parameters on the ground that the recovery from recession in Q4:2020 is fragile (0.1% GDP growth), and tightening of policy parameters may reverse the trend.
“With the reported decline in Headline inflation rate in April 2021, we are of the view that the MPC may have gotten a soft-landing to vote for the retaining of all monetary policy parameters during next week’s meeting.
“Besides, we believe the MPC’s voting pattern will also be shaped by the Q1:2021 GDP numbers likely to be published next week Monday by the NBS. Hence, given our projection of a maximum 2.1% year-on-year GDP growth in Q1:2021, we submit that the MPC may likely retain all monetary variable parameters at the end of next week’s meeting”, Afrinvest said.
Disinflation: Nigeria’s Monetary Authority to Keep Key Rates Steady
