Rising Inflation Unlikely to Prompt Monetary Policy Tightening –Experts
Godwin Emefiele, CBN Governor

Rising Inflation Unlikely to Prompt Monetary Policy Tightening –Experts

After 18 consecutive rise in Nigeria’s headline inflation rate, conventional wisdom dictates the monetary policy authority would tighten reins on price movement by raising interest rate.

But, some pundits have noted that the monetary policy is unlikely to deviate from pro-growth stance that ushered in low interest rate environment.

MarketForces Africa gathered that due to sizeable amount of borrowing that government will access via domestic debt market, benchmark interest rate may not be used as a tool to combat rising inflation.

However, some analysts think that financial repression is actually coming to an end as average yields on securities instruments have maintained uptrend.

Godwin Emefiele, Governor, Central Bank of Nigeria (CBN) had noted that the uptrend in average price level is mainly driven by supply shocks.

In a new report, Coronation Merchant Bank said in the meantime, the setting of official rates by the Monetary Policy Committee (MPC) of the CBN will continue to tread the delicate path.

Coronation explained that the CBN would thread delicate path between pro-growth policies and anti-inflationary policies.

“The current Monetary Policy Rate (MPR) is 11.5% and the MPC is due to conclude its second meeting of 2020 this time next week. In view of inflation, a cut in the MPR seems unlikely”, Coronation said.

In the context of fragile growth, analysts at Coronation think the MPC might retain the 11.5% MPR while allowing market interest rates to climb further.

“We only rate a small chance of the MPC raising the MPR”, it added.

Similarly, in a commentary, Capital Economics said the latest jump in Nigerian inflation, to 17.3% year on year in February is unlikely to prompt the CBN to tighten monetary policy as concerns about a weak recovery mount.

Record-high food inflation pushing up headline rate

National Bureau of Statistics reported that that inflation in Nigeria increased from 16.47% in January to 17.3% in February, the highest since early 2017.

“The outturn was above our estimate of 17.0% year on year surge as well as the Bloomberg consensus of 17.1%”, Capital Economics stated.

The report showed that food inflation in particular increased to a record high of 21.7% year on year in February, from 20.5% in January.

This pushed up the headline rate by 0.6% percentage points, thus further widening misery index in the country.

Economists noted that the ongoing security problems, including widely publicised kidnappings, continued to disrupt the food supply chain.

Capital Economics said a weaker currency and FX restrictions seem to have contributed to increased imported food inflation.

NBS report indicated that price pressures rose across the board.

The breakdown showed that transport inflation increased from 13.5% year on year in January to 14.1% last month as steps to liberalise Nigeria’s energy market somewhat allowed the recovery in global oil prices to feed through to higher fuel prices.

Housing inflation picked up, to 11.9% year on year, as well in February just as core inflation rose to 12.4%, the highest since mid-2017.

“The headline rate is likely to remain elevated in the coming months”, Capital Economics said in a report. 

It explained that food price pressures are unlikely to unwind rapidly while the rebound in oil prices will keep transport inflation high.

“That said, we think that inflation should start to drop back markedly in the second half of 2021”, the firm stated.

Economists noted that at the start of the year, policymakers at the Central Bank of Nigeria appeared optimistic that price pressures will ease.

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“While the sanguine inflation view might be adjusted, we doubt that the central bank will make a hawkish turn in the face of rising inflation”.

Analysts noted that concerns about a weak economic recovery will probably keep policymakers from hiking interest rates and may even tilt the balance towards easing later this year.

In its view, WSTC Securities said despite the rising yields in the fixed income markets, the body language of the monetary policy makers is still an accommodative stance.

“Policy makers believe that structural issues are the core problem, but we sense that they include market interest rates in the mix when it comes to considering all the drivers of inflation.

“This could mean that the current upward trend in market interest rates will be tolerated – to an extent. We are looking for 10.00% per annum 1-year T-bill rates by mid-year”, Coronation explained

Where are interest rates headed?

CBN argues that inflation is not just about interest rates that structural factors are the key determinant, analysts think insecurity in agricultural supply lines is a critical issue.

In its view, Coronation also registered that structural factors; foreign exchange rates; interest rates; credit growth; commodity prices are the major inflation drivers.

In its report, Coronation said after last year’s remarkable decline in market interest rates when 1-year T-bill rates fell from 5.40% in January 2020 to 0.15% in early December, rates have been rising this year.

The rise in market interest rates since the beginning of January has been steep, with an average of 309 basis points added to the yields of Federal Government of Nigeria bonds with durations of between two and 15 years.

However, it said over the past month, the yield curve in the secondary market for T-bills and FGN bonds has not changed much, the line waving like a flexed length of rope.

Market participants relate that funds still have plenty of liquidity but nevertheless expect rates to continue going up.

This is reflected in the results of the Primary Market Auctions (PMA) of T-bills. Last week the stop-rate for 1-year paper was 6.50% (a yield of 6.95% per annum): two weeks before that the stop rate had been 5.50%.

The firm explained that the PMAs are considered more liquid and more representative of rates than secondary-market T-bills.

Is it desirable for market interest rates to trend higher?

In terms of progress towards the rate of inflation, there is little argument.

On the other hand, the CBN believes that the low interest rate regime of 2020 was important in alleviating the effects of recession.

Indeed, 2020 recession was lighter than mid-year IMF and World Bank predictions, analyst explained.

“Allowing market interest rates to rise now could put a brake on the recovery (the non-oil economy grew by 1.69% y/y in Q4 2020).

“For this reason, the CBN might tolerate rising rates, but only so far. Our view is that T-bill rates (in the PMAs) can get to 10.00% per annum by mid-year”, Coronation said.

Rising Inflation Unlikely to Prompt Monetary Policy Tightening –Experts