Soaring inflation rate may force CBN to raise interest rate – FDC

An inflation rate of more than 18 percent could prompt the Central Bank of Nigeria to adopt a tighter monetary policy stance at its meeting next month by increasing the monetary policy rate, the Financial Derivatives Company Limited has said.

The MPR, also known as the benchmark interest rate, was left unchanged at 11.5 percent at the last meeting of CBN’s Monetary Policy Committee.

Nigeria’s headline inflation increased sharply to 18.17 percent in March, the highest level since January 2017, from 17.33 percent in February, according to the National Bureau of Statistics.

“It is also the 19th consecutive monthly increase. The continued rise in the general price level suggests that price inflation is not transient but now more persistent,” the FDC, led by renowned economist Bismarck Rewane, said.

The FDC analysts said the major inflation-stoking factors ranged from higher costs of refined petroleum products to an exchange rate pass-through to consumers and the impact of high-powered money with a shorter transmission time lag into the markets.

They said, “Also, the decline in imported raw materials due to forex rationing is forcing manufacturers to look inwards for local substitutes, reducing the supply of commodities to retail markets. This time around, all the various inflation baskets deteriorated.

“This shows that the impact of government interventions is falling far short of expectations in spurring output. It also reveals that money supply growth (1.41 percent) is compounding the demand pull effect on the general price level.

Total agric intervention was N1.487trn (0.78 percent of GDP), which is not only inadequate nominally but will also have a very limited multiplier effect on aggregate output, according to FDC.

The analysts noted that in March, the year-on-year food inflation increased sharply by 1.16 percent to 22.95 percent.

They said the spike in the annual general food price level was an indication that output levels were below what was recorded in March 2020 (pre-COVID lockdown).

They added that the COVID-19 restrictions and heightened insecurity prevented farmers from operating at optimal capacity during the planting season.

The analysts said, “We expect a further build-up in inflationary pressures in the coming months as a result of the planting season, heightening insecurity issues, currency pressures and high-powered money.

“Inflation rate above 18 per cent could prompt the CBN to adopt a tighter monetary policy stance at its meeting next month. As interest rates increase, we expect the marginal propensity to save to rise, thus reducing liquidity and tapering inflation,” they added.