Nigeria: CBN May Tighten Monetary Policy Over Rising Inflation

Godwin Emefiele

Analysts have said the Central Bank of Nigeria (CBN) may have to further tighten monetary policy if the inflation figure for August rises despite the resolve of Godwin Emefiele, its governor, to work towards lowering rates.

Inflation has been on the rise since March this year and is inching closer to the nine per cent ceiling that the CBN set for this year, standing at 8.3 per cent in July. The Monetary Policy Committee of the apex bank has consistently held lending rate at 12 per cent since October 2012, although it had tinkered with cash reserve requirement as a measure to reduce liquidity. The CBN governor, Godwin Emefiele, had in his maiden speech in June, stated his resolve to ease monetary policy.

Analysts at Financial Derivatives Company Limited envisage a rise in the inflation rate to 8.7 per cent in August saying an “increase in the headline consumer price index will affect previous assumptions of members of the MPC and may prompt a change in policy stance.”

In the company’s September Bulletin, FDC analysts say the CBN would likely increase the monetary policy rate, CRR on public or private sector deposit. According to the analysts “likely responses to this creeping threat to inflation include increase in CRR on private sector deposit from 15 per cent to 18 per cent, increase in CRR on public sector deposit from 75 per cent to 100 per cent or increase in the MPR by 200-300 basis points from the current 12 per cent.”

With headline inflation expected to further rise for the sixth consecutive time this year, the analysts said the “reasons for the spike in the consumer price level include lagged effect of naira depreciation in the foreign exchange markets, positive growth in money supply of 3.12 per cent in July 2014, and the lower than expected agricultural output so far in 2014.”

There is also the threat of an expected continual increase in inflation in September and the rest of the fourth quarter as government increase spending on security as fighting the spread of Ebola Viral Disease (EVD). The outbreak of the Ebola virus is taking its toll on West African economies, estimated a t $13 billion and cutting into growth. The epidemic is causing people and companies t o cancel projects, while some countries such as Kenya, Senegal and South Africa have issued travel restrictions.

According to the International Monetary Fund (IMF), economic growth in the worst hit countries (Liberia, Guinea and Sierra Leone) has been projected to drop by at least two percentage points by the IMF. The United Nations also highlighted the impact of the virus on food prices and distribution as well as the likely difficulty farmers will face to access their farms in affected countries. Although, Wall Street Journal had said global inflation slowed in July as energy prices eased, reflecting a sluggish growth during the first half of 2014, Sub Sahara Africa countries are witnessing the opposite as inflation trends northwards.

Annual inflation rates fell in the United States, Canada, Japan and the United Kingdom as well as in Indonesia, Russia and Saudi Arabia. India and South Africa were large economies to record a pickup in consumer prices.

However, Nigeria, Ghana (15 .3 percent) , South Africa (6.3 percent) , Kenya (8.36 percent ) and Angola (6.98 percent) are all recording increasing rates of inflation, and despite the growing inflationary trend, most of the economies’ central banks have maintained the status quo on monetary policy.

Source: Leadership