Imported Inflation: Analysts Differ on Interest Rate Outlook

Imported Inflation: Analysts Differ on Interest Rate Outlook

An estimated spike in imported inflation is expected to top discussion at the monetary authority’s meeting next month following a large devaluation of the naira in a country that depends heavily on goods and services imports from offshore.

With the recent devaluation of the naira, Nigerian companies are expected to pay more for goods and services imports, and they are also expected to transmit the impacts to consumers. Analysts said the apex bank will struggle to find a middle ground as the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) is scheduled to meet in July.

Analysts have expressed a different view on Nigeria’s benchmark interest rate outlook on increasing uncertainties in the economy.

However, Fitch Solutions/BMI Country Risk and Industry Research said in its economic report that the apex will halt its hawkish fist on the economy. But, a slew of analysts told MarketForces Africa they think cutting interest will drive credit creation, which would worsen inflation conditions.

The Nigerian economy is facing buckets of uncertainties as key macroeconomic indicators plunged to an all-time high. Inflation, interest and unemployment rates are riding on double digits band waves as monetary policy tightened failed to subdue worsening price levels. In a bid to fight off inflation, the apex bank has increased the benchmark interest rate by 700 basis points to 18.5%, the move that started in May 2022 – however largely ineffective.

At the next MPC meeting scheduled to hold in July 2023, Chinwe Egwin, Chief Economist at Coronation Research expects a +50 basis points policy rate hike or a hold stance, noting that the monetary policy rate minus inflation currently stands at -3.9%.


“We believe that consumer price inflation in Nigeria will increase further in the coming months – from 22.4% in May – on the back of the removal of the fuel subsidy and the unification of Nigeria’s exchange rate windows”, Fitchsolution said in a research report. Despite the anticipated rise in inflation, analysts said they expect the CBN to cut interest rates by 150 basis points by end-2023, reversing its monetary tightening cycle.

The removal of Nigeria’s fuel subsidy will also drive up inflationary pressures in neighbouring countries, including Benin, Cameroon, Chad and Niger, according to analysts.

BMI report projected that consumer price inflation in Nigeria will increase further in the coming months. Inflation reached an 18-year high of 22.4% in May, driven by rising food and transport prices. Widespread insecurity – which pushes farmers to urban areas – and the impact of floods in 2022 has exerted upward pressure on food prices.

In the first half of the year, fuel shortages – caused by dollar scarcity – have diverted more consumers to unofficial retailers, where pump prices are substantially higher than the official government-set price – adding to inflationary pressures.

In the first five months of 2023, inflation averaged 22.1%, well above the 16.3% recorded in the same period of 2022. The substantial weakening of the naira will sharply increase prices of imported goods and services, including refined petroleum, machinery and mechanical appliances, pharmaceutical products, and iron and steel.

As Nigeria is reliant on these imports, BMI said in a report the research firm expects this to ripple through the economy, sharply increasing inflationary pressures in the months ahead.

On June 9, Tinubu suspended the governor of the CBN, Godwin Emefiele – due to an ongoing investigation into his office and his financial sector reforms – and appointed Deputy Governor Folashodun Shonubi as the acting governor.

“We believe that Shonubi’s governorship will be temporary and that – in the coming weeks – Nigeria’s Senate will likely appoint a new governor who aligns with the president’s view that high interest rates are harmful to the economy”.

“As such, we now believe that the CBN’s policy rate will be lowered by 150 basis points (bps) to 17.00% by end-2023, compared to our previous forecast of an additional 50bps hike to 19.00%”, BMI said.

While this will make inflation somewhat more entrenched, the overall impact of unorthodox monetary policy on inflation will be limited given Nigeria’s relatively weak transmission mechanism and the supply-side nature of price pressures.

The removal of Nigeria’s fuel subsidy will also drive up inflationary pressures in neighbouring countries. Historically, Nigeria has offered heavily subsidised fuel prices, which – given Nigeria’s porous borders and weak law enforcement – have resulted in smugglers channelling fuel to neighbouring countries where petrol prices are traditionally higher.

According to the Nigerian National Petroleum Corporation, roughly 20 million litres of petrol is smuggled outside Nigeria daily. This dynamic has distorted fuel price mechanisms in countries bordering Nigeria.

Fitch Solutions projected that consumer price growth will average 27.9% in 2023 – the highest annual rate since the 1990s. This forecast is informed by two key policy shifts.
First, the removal of Nigeria’s longstanding fuel subsidy will drive up consumer prices. Despite transport only accounting for 6.5% of Nigeria’s inflation basket, analysts believe the sharp hike in retail pump prices will significantly pressure headline inflation.

Indeed, rising transport costs will have a cascading effect on various sectors of the economy, especially those that are particularly reliant on fuel, including the already under-pressure agricultural sector.

“We expect that higher operational costs for farmers – as well as transporters and retailers – will drive up food prices, which account for 51.8% of Nigeria’s consumer price index”. Second, a weaker naira following the unification of Nigeria’s exchange rate windows will increase imported inflation. The naira fell from N472 to a record low of N770.17 /USD on Friday.

Analysts believe that the exchange rate will converge with the parallel market rate – a better indicator of the naira’s real value – which trades around N775/USD.

The unit will then pare back some of its losses in the short term given improved dollar supply and stronger investor sentiment towards Nigerian assets, and end 2023 at N700/USD, BMI report said. #Imported Inflation: Analysts Differ on Interest Rate Outlook

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