CBN’s Interest Rate Hikes Fail to Curb Inflation
Godwin Emefiele, CBN Governor

CBN’s Interest Rate Hikes Fail to Curb Inflation

Perhaps the Central Bank of Nigeria (CBN) monetary policy committee will seat back to rethink the decision to continue to hike benchmark interest rates in a growth-starved economy after its response to Nigeria’s running inflation rate failed.

With headline inflation running ahead, a distance record against the Central Bank of Nigeria’s (CBN) single-digit target, it has become obvious that the policy committee has been pursuing shadow despite the investment banking firm’s warning.

Since May 2022 benchmark interest rate has come up strong at 6.5% in addition to pre-CBNs’ monetary policy tightening level of 11.5%. Still, headline inflation continues to gallivant, and with a disturbing outlook, according to analysts’ estimates.

The latest report by the statistics office shows that the consumer price index worsened to 0.18% in April as the inflation rate printed at 22.22% amidst confirmed failed inflation fighting efforts.  According to PAC Capital Limited, headline inflation for April marked its 4th consecutive uptick in the year, reaching 22.22% as legacy inflationary drivers tightened their grip.

Interpreting the National Bureau of Statistics data, analysts said the April 2023 inflation rate showed an increase of 0.18% points when compared to March 2023 headline inflation rate.  Similarly, on a year-on-year basis, the headline inflation rate was 5.40% points higher compared to the rate recorded in April 2022, which was 16.82%.

“This shows that the headline inflation rate on a year-on-year basis increased in April 2023 when compared to the same month in the preceding year (i.e. April 2022)”, PAC Capital stated.

Looking at the leading drivers of the general increase in prices in April, Food & Non-Alcoholic Beverages (11.5%), Housing Water, Electricity, Gas & Other Fuel (3.72%), Clothing & Footwear (1.70%), Transport (1.45%).

On a month-on-month basis, the All-Items Index in April 2023 was 1.91%, which was 0.05% points higher than the rate recorded in March 2023 (1.86%). This means that in April 2023, on average, the general price level was 0.05% higher relative to March 2023.

The urban inflation rate in April 2023 was 23.39% on a year-on-year basis, this was 6.05% points higher compared to the 17.35% recorded in April 2022. On a month-on-month basis, the urban inflation rate was 2.05% in April 2023, this was 0.05% points higher compared to March 2023 (2.00%).

The rural inflation rate in April 2023 was 21.14% on a year-on-year basis; this was 4.82% points higher compared to the 16.32% recorded in April 2022. On a month-on-month basis, the rural inflation rate in April 2023 was 1.78%, up slightly by 0.06% points compared to March 2023 (1.72%).

The corresponding twelve months average for the rural inflation rate in April 2023 was 20.18%. This was 4.27% points higher compared to the 15.91% recorded in April 2022. The food inflation rate in April 2023 was 24.61% on a year-on-year basis, which was 6.24% points higher compared to the rate recorded in April 2022 (18.37%).

The rise in food inflation on a year-on-year basis was caused by increases in prices of Oil and fat, Bread and cereals, Fish, Potatoes, Yam and other tubers, Fruits, Meat, Vegetable, and Spirits. On a month-on-month basis, the food inflation rate in April 2023 was 2.13%, this was 0.06% points higher compared to the rate recorded in March 2023 (2.07%).

“Despite the efforts of Nigeria’s monetary policy committee to stabilize prices, the country’s inflation continues to defile the policy interventions.

“We believe the upward inflation trajectory will further give room to policy tightening measures by the CBN at the coming May 2023 MPC meeting as the Committee continue to battle against galloping inflation”, PAC Capital added.

Analysts stated that they expect inflation to continue to rise in 2023 as the cost of production, exchange rate and other externalities remain factors to consider. 

In the medium term, analysts said they expect the CBN’s hawkish monetary policy to help in ameliorating the inflationary pressure. Also, the change in the country’s leadership by May 2023 is a factor to watch as new leaders are expected to implement policies that will result in price stability.

According to Coronation Research, inflation continues to be largely driven by structural issues such as insecurity, poor logistics, and energy supply, elevated commodity prices, and exchange rate pressure, among others.

Ahead of the monetary policy committee meeting, analysts at Coronation Research are expecting a hold stance or +25 basis points rate hike at best.  In its comment, Cordros Capital said while pressures are currently subsiding in the core basket amidst lingering currency pressures, analysts believe the 2023 Fiscal Policy Measures and 2022 Finance Act introduce fresh risks to the core inflation over the short term.

“We forecast the core inflation to settle at 1.55% m/m, with the favourable base effects from the prior year cascading to 19.75% y/y. Tying all together, we now look for a 1.89% m/m headline inflation rate, cascading to a y/y print of 22.35% in May”, Cordros capital stated. #CBN’s Interest Rate Hikes Fail to Curb Inflation

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