Tough Tasks for MPC as Inflation Rate Outpaces MPR
Tough job for the Central Bank of Nigeria’s Monetary Policy Committee as headline inflation which settled at 12.56% in June outpaced the benchmark interest rate of 12.50%, thus further widened negative return in the fixed income market.
The committee which is expected to meet July 20, would have to deal with rising inflation, lower interest and high unemployment rate in the economy to formulate its next monetary policy.
Meanwhile, analysts said that government protectionists’ policies, foreign exchange shortage will weigh on inflation in the second half.
Movement in average price level has lifted far above the CBN’s single digit inflation targeting.
Chapel Hill Denham research analysts explained that despite the recent decision to postpone the hike in electricity tariffs, its outlook for inflation remains biased to the upside.
The investment firm’s bias is however premise on four factors including the fact that the CBN seems to have hunkered down on protectionist policies.
Earlier this week, analysts said the CBN discontinued the supply of FX for the purpose importing maize/corn, thereby expanding the list of items banned form the official market to 44, with consequences for food processing and animal husbandry sectors.
Since movement restrictions were eased at the beginning of July, there are early signs that wet season planting, which typically takes place between April and July may be below average, due to COVID-19 induced movement restrictions and security challenges.
“We envisage a lower than average harvest season between in the third and fourth quarter of 2020”, Chapel Hill Denham stated.
Explaining further, analysts stated that the PPPRA raised the “guided” price of petrol by 14% in July, and the trajectory seems to be upward, as oil prices have turned a corner.
Chapel Hill Denham explained that FX liquidity challenges could weigh on production costs in the near term, with some pass-through effects on consumer prices.
“Against the backdrop of factors stated above, we estimate July inflation at 12.65%, but lower our year-end target to 13.1% due to the postponement of electricity tariff hike”, analysts stated.
The MPC meeting will be taking place against the backdrop of rising inflationary pressures and external sector instabilities.
Analysts stated that in normal times, the increasing downside risks to the CBN’s dual mandate (price and FX stability) typically call for tightening of monetary policy to attract portfolio capital and restore stability in the FX market.
However, in view of the COVID-19 induced growth challenges facing the country, with the government projecting a -4.2% real GDP contraction in 2020, analysts at Chapel Hill Denham said they imagine that the priority of the CBN will remain pro-growth in the near term.
Nigeria’s Inflation rate for June Spikes to 12.56%
“We expect the CBN to continue to deploy other administrative measures, such as Cash Reserve Requirements (CRR) debits and FX restrictions, to tighten Naira liquidity in the money market and reduce demand for foreign currencies in the FX market”, analysts stated.
Chapel Hill Denham stated that as inflation rate which settled at 12.56% in June and still rising; now above the benchmark Monetary Policy Rate of 12.50%, a question could emerge as to the appropriateness of keeping a negative real interest rate.
“In our view, the CBN has shown, by its actions in the past crises, Global financial crisis in 2008 and 2014-2016 oil price plunge, that it is willing to tolerate a period of negative policy real interest rate”, Chapel Hill Denham stated.
Besides, analysts stated that market interest rates have trended lower than inflation rate in recent months, due to lower supply of OMO bills and the ban placed on non-bank local investors from participating in the OMO market.
“As a result, despite increasing inflationary pressures, we do not envisage a policy rate hike at the meeting next week, nor in H2-2020.
“Rather, we expect the CBN to maintain status quo on key rates, including the MPR at 12.5%”, analysts at Chapel Hill Denham explained.
Tough Tasks for MPC as Inflation Rate Outpaces MPR
