CBN Headquarters

With the federal government's spending expected to increase by the third quarter of the year, economic watchers have warned that price pressure is expected to persist in the months ahead. Speaking against the background of rising inflationary trends for the month of June, the Financial Derivatives Company Limited, an economic and financial advisory firm, is predicting that price levels in the third quarter of the year could peak at 13 percent as against 12 percent recorded for the month of June.

The company's fear was rekindled by the fact that implementation of the new minimum wage would kick in the third quarter at the federal level and some state governors have also agreed to effect the same at the state levels. “Price levels could yet touch 13 percent per annum in the third quarter,” the company predicted. 

However, FDC said that in spite of the expected rise in the rate of inflation, which the current scenario has presented economic managers in the country and the tendency for the apex bank to adopt a tight macroeconomic stance, there is a need to address the problem of food inflation largely caused by the rising cost of haulage and transport of foodstuffs from farms, as a matter of urgency.

“Therefore, tightening the financial markets remains a necessary but not sufficient condition for managing the recent inflationary phenomenon,” stated FDC.

In order to contain the anticipated rise in inflation, FDC in its bi-monthly business and economic report, forewarned that the Central Bank of Nigeria is likely to raise the Monetary Policy Rate further by 50 basis points.

According to the report, “The Central Bank might resort to a cocktail of measures such as a 50 basis points increase in the MPR to 8.5 per cent per annum, step up its Open Market Operations and increase mop-up of excess liquidity. “It can do this by increasing both the frequency and volume of the intervention at the forex auction,” adding that the urgency of this is underscored by the rise in imported inflation and the likelihood of seeing the scenario play out has been increased by utterances of the CBN governor in recent weeks on the importance of exchange rate management to the Central Bank. 

The report said food inflation pressure is coming partly from the higher and fast growing cost of haulage and transport of foodstuff from the farms to the urban centres. 

“The price of diesel - the fuel used by trucks and trailers - has gone up by 26 percent to N165 per litre in the last quarter,” observed FDC.  

The report, however, indicated that the fiscal policy challenges remain mainly on how to tackle chronic unemployment estimated at 25 percent without overheating the economy. 

“The federal government also wants to expand economic activity with a counter-cyclical policy whilst achieving fiscal consolidation. The dilemma, on how to eliminate or reduce petrol subsidies whilst increasing the minimum wage and maintaining macroeconomic stability, remains a daunting task.”