The Chief Economist, Africa, Standard Chartered Bank, Razia Khan has predicted that inflation in Nigeria would decelerate this year, on a pronounced base effect and better agriculture growth.
Khan, while commenting on the outcome of Tuesday’s monetary policy committee meeting, in which the monetary policy rate and other policy instruments were retained, added that at the meeting, the committee signalled future policy easing was yet to come.
She noted that while the MPC decision was largely expected, the key takeaway from the meeting was what was being signalled regarding future policy.
“Some element of mixed messaging appears to be creeping in. On the one hand, we had a repeat of much of what we had heard last year: that the economy – although expected to recover – remains in a vulnerable position. Nonetheless, inflation is expected to decelerate on a pronounced base effect and better agriculture growth, and the CBN may even – at this meeting – have been signalling future policy easing yet to come,” the economist added.
However, Khan pointed out that the CBN also demonstrated that it was not immune to the criticism that money supply was running well above target, and to try to reassure on this front, the CBN pledged to redouble efforts to bring narrow money growth back within its preferred benchmark range.
“The proof is likely to lie in what actually ends up happening to money supply growth. All of the data, including CBN financing of the government, will be carefully scrutinised going forward. For now, the only clear takeaway is that there are no imminent plans for further FX liberalisation. FX will continue to be rationed, with key sectors being prioritised. There are no immediate plans for a real policy tightening as such.
“Could the CBN cut rates later this year? While this remains our core view, much will also depend on the level of debate at the MPC. What is clear from the publication of the personal statements of MPC members from the previous November meeting is that achieving a consensus around future policy decisions may be difficult.
“The MPC gets to decide – broadly – on the policy rates that are voted on (the MPR, the corridor around the MPR, the CRR, the liquidity ratio etc). But the ‘real action’ in terms of monetary policy may well have been the extent of money supply creation by the CBN, independent of these variables. Therein lies the policy dilemma,” she said.
Also, in his note on the outcome of the MPC meeting, FXTM Research Analyst, Mr. Lukman Otunuga, said the accelerating inflation levels remained a major cause for concern and stumbling block to Nigeria’s economic recovery. This, according to him was however not enough to prompt the central bank to raise interest rates from the record 14 per cent level.
“The fact that the nation is currently entangled in a fierce battle with cost-push inflation has created unease with concerns already heightened over the CBN running low on ammunition. It must be understood that the cause behind the incessant rise in consumer prices is the disparity between the official and black market exchange.
“Many producers in Nigeria do not have the ability to purchase the naira on the official exchange and are forced to use the black market which inevitably will make the products more expensive. The additional costs are reflected in prices which punish consumers and spark higher inflation levels.
“While most have suggested that the black market should not exist, it is the simple fundamentals of supply and demand that fuels this exchange. There is a possibility of the Central Bank of Nigeria accepting that the black market represents the true value of the naira which should encourage further devaluations on the official exchange this year in a bid to reclaim stability,” Otunuga stated.