Ahead of the Central Bank of Nigeria’s monetary policy committee (MPC) meeting next week on March 21 and 22, analysts say the reversal in the 15-month upward trend in inflation rate is unlikely to have an impact on the MPC decision.
February headline inflation fell 0.94 percentage points, to 17.78 percent from 18.72 percent in January, the National Bureau of Statistics (NBS) said Tuesday.
“This represents the first time in 15 months that the headline CPI has declined on a year on year basis, representing the effects of slower rises in already high food and non-food prices and favourable base effects over 2016 prices,” the NBS said.
Runaway inflation rate in the months before now, put pressure on policy makers to keep monetary policy rate (MPR), the benchmark interest rate, at a record high of 14 percent for a third consecutive meeting in January 2017.
Godwin Emefiele, the CBN governor shrugged off calls from Kemi Adeosun, minister of finance, to lower rates to support growth which collapsed to a 25-year low of -1.5 percent last year, arguing that loosening policy may worsen the inflationary situation.
Emefiele, instead urged President Muhammadu Buhari’s administration to approve the 2017 budget and spend money to boost factory and food production, unlike last year, when expenditure plans were delayed for almost five months.
However, as headline inflation begins to slack, hopes for a rate cut are rising, although some analysts think it will take month-on-month inflation to fall below 1 percent and stay there, to truly justify one.
“February headline inflation reflects the high base effects of last year and it sends a signal of a likely lower interest rate environment in the coming months,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
“We are already seeing a reduction in interest rates on Treasury Bills in line with slowing inflation, and unless we see a further devaluation in the naira, an increase in the fuel and electricity prices, inflation will sustain the decline and could touch 12.8 percent by year-end,” Ibrahim added.
The interest rate on three-month treasury bills declined 0.36 percent points, to 15.9 percent, while six-month bills were down 0.33 percent points to 19.5 percent on Tuesday, according to FMDQ data.
Pabina Yinkere, head of research at investment bank, Vetiva Capital, said despite the decline in February inflation, the environment remains inflationary.
“The month on month and food index increased, the sole reason there was a reduction year-on-year, is due to base effects and not necessarily that the cost of goods and services are sinking,” Yinkere said.
On a month-on-month basis, the Headline index increased by 1.49 percent in the period, 0.48 percent points higher from the rate of 1.01 percent recorded in January.
“I do not think the MPC will cut rates, buoyed by this, instead, I expect they will want to keep their eyes on month-on-month inflation and if this declines consistently and probably slides below 1 percent, maybe we can anticipate a rate cut then,” Yinkere added.
The apex bank did not cut rates in the period when month-on-month inflation went on a four-month declining streak last year, but Yinkere says the policy objective is different this time around and that a rate cut could be in the works if month -on-month inflation cools considerably.
“The policy objective then was maintaining price stability, but this time, the CBN has said it would pursue overall economic growth in line with its core mandate,” he said.
Ayo Akinwunmi, head of research at FSDH Merchant Bank, also thinks the CBN is unlikely to reduce rates at this time, unless there is no increase in petrol prices and electricity tariffs.
“At the current exchange rate and oil prices, it may be difficult for the government to maintain a retail price of N145 per litre for Premium Motor Spirit (PMS), and if an adjustment is made, it will lead to an increase in inflation,” Akinwunmi said.
“However, the improved foreign exchange supply, if sustained, may help curb inflationary pressures in the coming months,” he added.
In the newly released Economic Growth and Recovery Plan (ERGP) tailored towards lifting the economy out of recession, government targets 15.74 percent inflation by year-end.
Yinkere of Vetiva Capital says the target is slightly bearish, compared to Vetiva’s forecast of 14 percent, while Ibrahim of Chapel Hill Denham gave a forecast of 12.8 percent.
During the month of February, the highest year on year increases in prices were seen in electricity, liquid and solid fuels, fuels and lubricants for personal transport equipment, clothing materials, other articles of clothing and clothing accessories and book and stationaries, the NBS noted.
The Food Index increased by 18.53 percent (year-on-year) in February, up by 0.71 percent points from rate recorded in January (17.82) percent, driven by increases in the prices of bread, cereals, meat, fish, potatoes, yams and other tubers and wine, while the slowest increase in food prices year on year were recorded by soft drinks, coffee, tea and cocoa.
But analysts have also warned that the decline in inflation could be threatened if the current slide in crude oil prices is sustained.
“If the drop in crude oil prices continues, the pressure on government revenues and foreign exchange earnings which fuelled inflation would be back and the country could once again see an upward trend in inflation,” said an economist who did want to be named.
The recent surge in crude oil prices has helped the Central Bank of Nigeria (CBN) build external reserves to US$30 billion as at March 9 and increase supply of foreign exchange to the inter bank market which has helped reduce demand pressure in the parallel market, where many Nigerians in the informal business environment get their dollar supply. This has seen the naira appreciate in the black market from N520 at the end of February to N460 to the US$ currently. The CBN has promised to sustained the dollar supply to the inter bank market and offered to sell US$150 million on Tuesday. But with crude oil prices sliding again in the international markets, the capacity of the CBN to sustain this supply will soon be tested.
LOLADE AKINMURELE
