Interest Rate Hike Insufficient to Fight Difficult Inflation – Analysts
Nigeria needs to deploy other measures to combat ugly inflation conditions pushed by policy inconsistency of the past administration, analysts said, noting that with a structural deficiency; it will be difficult to successfully achieve price stability.
Some critics maintain a view that not so much has been achieved with interest rate hikes as a tool to combat Nigeria’s headline inflation despite monetary policy tightening. It is not clear at what point rate adjustment would be effective in curbing inflation from making further uptrend.
MarketForces Africa’s review of investment banking notes on the consumer price index forecast indicates that analysts are negative on their inflation expectation for the first half of 2024. By consensus, investment firms see Nigeria’s inflation rate climbing further as pressures on food remain.
“There has to be food security, the naira has to stabilise else, an interest rate hike may not be potent not as a matter of theoretical basis but for practical sake”, research analysts at LSintelligence Associates said.
Nigeria’s apex bank inflation fighting has caused sustained increases in interest but things have become worse with predictions showing the consumer price index would rise continually in 2024.
Inflation began to rise when the government closed its border in 2019 to wave off an influx of food and other goods from neighbouring countries. The reaction followed a decision to ban some items from accessing forex from the official window.
The protectionist stance of the former president, Mohammadu Buhari, triggered the border closure following large support for Agricultural produce. It then backfired as local farmers could not produce enough to meet aggregate needs.
Analysts believe that inflation-fighting policies have been inconsistent. Costs, rather than demand have been major drivers of increased consumer price levels. The core push is coming from an unstable exchange rate.
Hot red headline inflation is expected to hit 34% in March, according to a prediction made by Cowry Asset Management Limited following the pass-through effect of the naira devaluation and rising cost of living.
Nigeria’s inflation has become ugly with a continued push from negative impacts of government policy measures. In February, inflation soared to a staggering 31.70%, marking a distressing 28-year high.
According to analysts, this upward trajectory, persisting for fourteen consecutive months, reflects a multifaceted confluence of challenges gripping the nation’s economy.
The key underlying drivers of worrisome inflation conditions have been mounting insecurity disrupting vital food production regions, coupled with the cascading impact of subsidy removal on petrol and upward adjustments in exchange rates.
The statistics office reported that inflation rose 180 basis points from 29.90% in January 2024, which was above market expectation of 31% and closer to Cowry Asset’s forecast of 32%.
Analysts said the acceleration of headline inflation to levels not witnessed since April 1996 was expected to stay elevated as inflationary pressures continue to build up.
Cowry Asset said the faster speed of increase suggests that inflation has become difficult and is in doubt to reach an inflexion point in the near time. This is particularly so given the fact that the inflationary pressure is coming more from the food component which increased to 37.9%.
Analysts said particularly worrisome is the significant contribution of food and non-alcoholic beverages, comprising over half of the inflationary index at 51.80%, underscoring the acute vulnerability of Nigeria’s food supply chain.
Other contributing factors include housing and utility items, clothing and footwear, transportation costs, and educational and health amenities costs, accounting for 16.72%, 7.63%, 6.50%, 3.94%, and 3.0% respectively.
Details revealed the continued depreciation of the local currency exerts significant pressure on the core component of Nigeria’s inflation basket due to the country’s reliance on imported items.
The naira has depreciated by 60% between June 2023 when the foreign exchange market was liberalised and February 2024, according to an analysis of exchange rate movement.
This has escalated import costs, impacting Nigeria’s economy significantly as it heavily relies on imports and also exerts immense pressure on Nigeria’s inflation basket.
“.. We can say the inflationary pressures stemming from a myriad of factors, including escalated transportation costs, adverse effects of climate change on agricultural output, domestic security instabilities, geopolitical tensions such as the Russia-Ukraine conflict, and the protracted devaluation of the Nigerian Naira against the US dollar.
“Furthermore, structural challenges within the food and agriculture sector have perpetuated supply constraints, exacerbating inflationary pressures”, the investment firm stated.
Food inflation surged to 37.92% year-on-year in February 2024, the highest since August 2005, driven by increases in prices of staple commodities such as bread, cereals, potatoes, and meat.
Core inflation, which excludes the prices of volatile agricultural produces and energy stood at 25.13% in February 2024 on a year-on-year basis, the highest since March 2004 (25.95%); up by 6.76% when compared to the 18.37% recorded in February 2023.
The highest increases were recorded in prices of Passenger Transport by Road, Actual and Imputed Rentals for Housing, Medical Services, Pharmaceutical products, etc.
Across states of the federation, inflation rate on a Year-on-Year basis was highest in Kogi (37.98%), Oyo (36.60%), Bauchi (35.62%), while Borno (26.28%), Taraba (26.72%) and Benue (27.40%) recorded the slowest rise in Headline inflation.
On a Month-on-Month basis, however, February 2024 recorded the highest increases in Kwara (6.42%), Kebbi (4.64%), Adamawa (4.46%), while Katsina (1.93%), Cross River (1.98%) and Benue (2.33%) recorded the slowest rise on inflation in the period.
The continued uptick in inflationary pressures is expected to stay elevated for most of the year even as the country reels from the impact of insecurity challenges on food supply chain, Cowry Asset said in its commentary note.
This is further compounded by the increase in electricity tariffs, stamp duties, removal of subsidy on PMS and the upward exchange rates adjustment by the CBN to ease the pressure on the forex market.
Looking ahead, analysts said they expect the underlying drivers of inflation to continue exerting upward pressure on components of Nigeria’s inflation basket.
As such, Cowry Asset Management Limited anticipates that Nigeria’s headline inflation will continue its upward trend to 34% in March 2024 following the pass-through effect of the naira devaluation and rising cost of living. #Interest Rate Hike Insufficient to Fight Difficult Inflation – Analysts
