The Central Bank of Nigeria’s relative success at maintaining single-digit inflation – averaging 9.5 percent for all of 2013, for instance – will be meaningless without ensuring exchange rate stability and stopping current capital inflows reversal through higher yields on fixed income securities, analysts have said.
“Perhaps the good news is that market yields have moved higher in recent weeks (364-d T-bill yield at 15.6 percent on 17 March) but this is still not sufficient to turn the tide,” says Samir Gadio, emerging markets strategist at Standard Bank, London.
The analysts see the lack of sustenance of the two indicators which are critical to manufacturers as well as attracting foreign inflows as a threat to the nation’s celebration of single-digit regime in an import-dependent economy where imported goods constitute over 40.0 percent of the major components of consumer goods upon which inflation is determined on a monthly basis.
“We acknowledge the moderating inflation in 2014, currently at 7.7 percent in February, 300 basis points lower than 8.0 percent in January, and has remained within the single-digit band (Average 2013:9.5 percent). In our view, the focal point at the next MPC meeting will be more skewed towards ensuring exchange rate stability and calming capital inflows reversals,” say Afrinvest analysts.
“The duo pose a major threat to single-digit inflation rate if not curtailed. Notably, Nigeria is an import-dependent nation and imported goods constitute over 40.0 percent of the CPI basket, hence any significant depreciation or devaluation of the naira will translate to higher prices of goods and services (imported inflation) pushing rate upwards,” they add.
Similarly, Razia Khan, analyst with Standard Chartered Bank, London, says that despite the better-than-expected headline print, “we note that core inflation ticked up pretty sharply in February. It is this reflection of underlying pressures that will concern the CBN”.
Speaking further, Gadio says that the persistent single-digit inflation path is unlikely to push the MPC to ease monetary conditions at the meeting, adding, “If anything, the risks to policy rates and/or the CRR are more to the upside, although the big concern is that a neutral decision may still prevail, which will send a negative signal to the market.”
He adds that given the continued erosion of FX reserves and pressure on the exchange rate, further monetary tightening is urgently required at the meeting to restore the competitiveness of Nigerian fixed income assets versus emerging market peers.
“Although Nigeria’s inflation print surprised positively, we do not think that past headline inflation will form the key basis for the CBN’s monetary policy decision. With further FX weakness to factor in to the inflation outlook, as well as the traditional pressure on food prices as we enter the planting season, we expect inflation to continue to rise in the months ahead. Any additional spending ahead of the election would be a source of further pressure on inflation,” Khan further says.
Noting that the CBN’s key concern at the meeting is likely to be FX stability, the London-based analyst says that “while the CBN has successfully safeguarded FX stability to date, it has done so by running down its FX reserves. This is a worrying situation as it may not be as easy to replenish reserves, given the general climate ahead”.
The only way out for the policymakers, she says, is for the CBN to shore up FX reserves, adding, “A key part of the CBN’s ability to deliver on its price stability mandate – that will govern the outcome of the MPC meeting. An additional hike in the public sector CRR looks likely. Also likely is the implicit recognition of a different FX band.”
JOHN OMACHONU
