20 May 2019

Nigeria: Renewed Inflationary Pressure May Force MPC's Hands On Interest Rate

The renewed inflationary pressure in the country is expected to be among the key focus at the Central Bank of Nigeria's (CBN) Monetary Policy Committee (MPC) meeting which commences in Abuja today.

The outcome of the two-day meeting would be announced tomorrow.

Evidence suggests that higher inflation momentum in the months ahead may continue to build up as rise in banditry threatens food security in Nigeria.

The development may compel the MPC which at its last meeting had signalled the loosening of monetary policy, to reverse its stance.

At its last meeting in March 2019, the MPC, in contrast to the expectation of most analysts, had decided to cut the benchmark Monetary Policy Rate (MPR) by 50 basis points (bps).

The MPC members had reached the decision after considering both the global and domestic economic environment.

Precisely, the committee had cut the MPR to 13.50 per cent; retained the asymmetric corridor of +200/-500 basis point around the MPR; retained the Cash Reserve Ratio (CRR) at 22.5 per cent; and retained the liquidity ratio at 30 per cent.

After monthly consecutive drop since January, the Consumer Price Index (CPI), which measures inflation rose to 11.37 per cent year-on-year in April compared to 11.25 per cent in March, according to the National Bureau of Statistics (NBS).

Inflation had resumed its descent in January when it dropped to 11.37 per cent from 11.44 per cent in December in 2018.

The headline index further reduced to 11.31 per cent in February and 11.25 per cent in March before resorting to the upward trajectory in April.

But the latest report by NBS released last Thursday, showed that food inflation stood at 13.70 per cent in April, higher than 13.45 per cent recorded the preceding month. The CPI figures for April had shown that core inflation stood at 9.30 per cent in the month under review compared to 9.50 per cent in March.

Clearly, the high rate of banditry and kidnappings in the north-western part of the country is having a spiral effect on food production in the region, thereby pushing inflation higher.

The All Farmers Association of Nigeria and Rice Farmers Association of Nigeria, in recent interviews had stated activities of the bandits were discouraging farmers in the region, disclosing that the bandits had displaced more than 10,000 households, mostly peasant farmers, in Zamfara, while in Kebbi, the hub of rice farming in Nigeria, no fewer than 350 farmers had been forced to abandon their farms by the criminals.

The Secretary of AFAN in Kebbi, Alhaji Muhammad Idris, had said: "Over 350 farmers have been affected as a result of the banditry in Danko/Wasagu, Argungu, Yauri, Ngaski, Zuru and Birnin Kebbi local government areas.

"Our members, especially rice farmers, have stopped going to their farmlands in those areas for fear of being kidnapped or killed.

"Rice farming is not like any other farming as it requires constant and close monitoring; you have to be closer and observant of how it grows and the level of water and all that, hence you have to be going to the farm everyday if not, it will not yield positive result."

Owing to this development, analysts at FSDH Merchant Bank Limited, in their prediction on the expectation from the MPC meeting stated: "Given that the major objective of the MPC is to ensure price stability in the economy, inflation rate is one major pointer to the direction the MPC may adopt.

"For the first time in 2019, inflation rate rose in April to 11.37 per cent, from 11.25 per cent in March. The rise in inflation is an indication of inflationary pressure and suggests that the MPC adopts a cautious approach and maintain rates."

The firm added: "FSDH Research reiterates that the current structural issues in the economy do not support strong growth in credit. Measures that remove the inherent risks in the economy will be required to stimulate credit creation.

"The MPC members may be inclined towards reducing policy rates, however, FSDH Research believes the short-term outlook of the global economy remains uncertain and may not sustain strong growth in crude oil prices. Therefore, considering the current situation, a cautious approach to the conduct of monetary policy is appropriate."

Also, analysts at Cowry Asset Management Limited anticipated that, "inflation rate to further move upwards in the months of May and June amid Ramadan festivities and the recent signing of the new minimum wage bill."

Also, a report by the Financial Derivatives Company Limited predicted further rise in inflation in May and June.

"This would be driven by both demand-pull and cost-push inflation factors. The commencement of planting season will result in food supply shortages while the minimum wage implementation and the Ramadan fast would increase consumer demand.

"All things being equal, the confluence of supply shortages and increased demand would exert pressure on prices. The re-emergence of inflationary pressures increases the probability of the MPC members adopting a more hawkish monetary policy stance at its May meeting," it added.

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