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Inflation: Will CBN Shift Ground on MPR Tomorrow?

19 May 2013

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The die is cast as the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets tomorrow to review the nation’s economy and come up with a new monetary policy rate. Analysts are, however, divided on whether the time is ripe or not for the apex bank to soften its stance on the rate, reports  Festus Akanbi

Economic statistics reeled out by various agents of government last week have raised the prospect of a tighter monetary policy when the Central Bank of Nigeria (CBN’s) Monetary Policy Committee (MPC) meets tomorrow.
However, some economic watchers said there is still room for a slight reduction in the Monetary Policy Rate in the interest of the real sector of the economy.

The first tranche of the economic reports, which hit the media earlier in the week, showed that the nation’s Gross Domestic Product (GDP) reduced marginally to 6.6 percent in the first quarter of the year as against 6.9 percent year-in-year in the fourth quarter of last year. It was a development which analysts have blamed on a corresponding drop in oil output in the fourth quarter of last year.

Drop in Oil Output
Data released by the CBN last week showed that oil output dropped to an average of 2.00Mb/d in 4Q12, from a solid 2.45Mb/d in the previous quarter and 2.32Mb/d a year earlier.

According to a report by the international financial advisory firm, Renaissance Capital, “Oil GDP’s significant contraction largely explains the slowdown in Nigeria’s GDP growth. Non-oil GDP growth slowed to 7.9% YoY in 1Q13, from 8.2% YoY the previous quarter, but was flat compared with a year earlier, to our surprise, given the dampening effect of the partial removal of the petrol subsidy in 1Q12.”

Members of the economic community, who had returned to the drawing board to make adjustments in line with the current reality, however, had to pause by the time the National Bureau of Statistics released its inflation figures for the month of April.

Inflation
In April of 2013, the inflation rate rose by 9.1 percent year-on-year, compared to 8.6 percent in March. This is the fourth consecutive month of single digit year-on-year rates being recorded.

The NBS explained that relative to March, the rise in the annual headline index could be primarily attributed to higher price levels of food products due to the effect of declining inventories. At this time in the planting season, what is sold are food products which were harvested late last year and the limited supplies of these farm with a relatively stable demand, pushes prices higher.
On a month-over-month basis, the inflation rate increased by 0.55 percent from index levels recorded in March.

The report also showed that the urban composite CPI was recorded at 143.7 in April, indicating a 9.7 per cent year-on-year change. This was higher than the 9.3 per cent recorded in March. The corresponding rural national CPI recorded an 8.9 per cent year-on-year change, up from 8.1 per cent in March.
In April, the composite food index increased year-on-year by 10 percent. This was 0.5 percentage points higher than the 9.5 percent recorded in March.

On a month-on-month basis, the food index increased by 0.6 percent between March and April. As in March, food prices were higher across all classes in the food sub-index.

“According to their contribution, the largest contributors to the increase in the food index were bread and cereals, potatoes, yams and other tubers, and vegetables. The average annual rate of rise of the food index for the 12-month period ending April 2013 was 10.8 percent when compared with the same period in 2012. This was lower by 0.2 percentage points from the 11.0 per cent recorded in March.

“In April, the Core index, which excludes the prices of volatile agricultural products (but includes “processed foods”, increased by 6.9 percent year-on-year. This was lower than 7.2 percent recorded in March. On a month-on-month basis, the core index slowed by 0.2 percent from March to April 2013, as classes of the core index witnessed muted increases coupled with the relative stability in prices of processed foods, pulling the overall core sub-index. The core index has increased generally at a decreasing rate since 2013 which, in addition to base effects, has contributed to slower rises in inflation,” the NBS report stated.

Economists Divided
One of the economists that reacted to the latest inflation figure at the weekend was Head Research and Intelligence, BGL Plc, Mr. Olufemi Ademola.
He agreed with the NBS that the marginal increase in the inflation data for April could be traced to rise in food price levels.
He said, “As stated by the National Bureau of Statistics (NBS), the increase in inflation rate to 9.1% in April 2013 from 8.6% in March 2013 could be due primarily to cyclical effects of higher price levels of food products due to the effect of declining inventories.

“According to the NBS “at this time in the planting season, what is sold are food products which were harvested, late last year and the limited supplies of these farm with a relatively stable demand, pushes prices higher”. This may also be justified by the fact that the same trend was witnessed in 2012 when inflation rate increased from 12.1% in March to 12.9% in April.

Removing Structural Constraints
“Having said this, it should be noted that despite the increase, inflation rate in still within the targeted single-digit rate for 2013. While the NBS might be correct that the development “may be connected to more prudent fiscal measures together with aggressive stance of monetary policy”, having agreed that the inflation issues in Nigeria is more a structural issue than a monetary phenomenon, I would give more weight to the fiscal measures aimed at removing structural constraints to real sector business activities as the main driver.”

Rate Cut Unlikely
However, the BGL chief did not foresee a reduction in the monetary policy rate when the MPC meeting holds tomorrow, saying “Although there have been compelling arguments to consider easing the monetary policy based on the achievement of a reasonable degree of moderation in inflation rate, declining growth rate due to slowdown in agricultural and manufacturing output growth and the sustained crowding out of small and medium scale enterprises (SMEs) from access to credit at the current lending rate, the current increase in inflation will provide more room for additional direct policy contraction by the Monetary Policy Committee (MPC) to preserve the current gains of macroeconomic stability in the short term, while fiscal and structural reforms are entrusted with long term stability.
“Without disregarding the need to stimulate growth by making cost of funds cheaper for businesses, given the volatile inflation environment, high liquidity in the financial market and the unabated foreign exchange market pressure, there is no incentive to reverse the monetary policy stance in the short term. The MPC is therefore likely to keep the monetary policy tight by holding the benchmark rate and other policy indicators unchanged at its meeting on Monday and Tuesday.”

However, other analysts did not see why the CBN will not tinker with the current monetary policy rate in view of the strangulating effect it has on the real sector of the economy.

Nigerian Economy Still in Comfort Zone
One of such experts is the Managing Director, Financial Derivatives Limited, Mr. Bismarck Rewane. He believed the latest inflation rate of 9.1 still leaves the Nigerian economy in a comfort zone, saying there is need to save the real sector which is currently under the yoke of high interest rate regime in banks.

“I believe that at 9.1, the inflation figure is still within the comfort zone of the Central Bank of Nigeria. The trend is comfortable although this may alter CBN calculation but I believe it doesn’t pose a threat to economic stability.

Higher inflation may make some people think we should wait a little bit before easing the monetary policy rates, but I believe in order to stimulate lending, a 25 percent reduction in the MPR could be accommodated.”

Rewane advised the CBN to respond to the yearnings of the people by putting in place measures to help the economy.
“If I were the CBN Governor, I will watch the market performance for a while before responding appropriately,”Rewane stated.

In her assessment of the nation’s financial sector, Renaissance Capital’s Sub-Saharan Africa Economist, Yvonne Mhango had argued that softening inflation and subdued credit growth may fuel arguments to cut the Monetary Policy Rate (MPR) and/or reduce the cash reserve requirement at tomorrow’s Monetary Policy Committee (MPC) meeting.

“Weak credit growth and the softening of inflation in 1Q13may add to arguments to cut the MPR and/or reduce the cash reserve requirement at the next MPC meeting in May. However, the slowdown in the build-up of FX reserves in recent weeks, downside risks to oil production and the recent drop in the international oil price, have increased the risk to the naira and are likely to keep the MPC from easing policy in the near term. Our 2013 year end MPR projection is 11 she said” she said.

Historically, from 2006 until 2013, Nigeria Inflation Rate averaged 10.61 percent reaching an all-time high of 15.60 percent in February of 2010 and a record low of 3 percent in July of 2006. In Nigeria, the Consumer Price Index (CPI) measures the change over time in prices of 740 goods and services consumed by people for day-to-day living. The index weights are based on expenditures of both urban and rural households in the 36 states.

The most important categories in the CPI are Food and Non Alcoholic Beverages (51.8 percent of total weight); Housing, Water, Electricity, Gas and Other Fuel (16.7 percent) and Clothing and Footwear (7.7 percent). Transports account for 6.5 percent of total index and Furnishings and Household Equipment Maintenance for 5 percent. Education represents 3.9 percent of total weight, Health 3 percent, Miscellaneous Goods and Services 1.7 percent and Restaurants and Hotels 1.2 percent. Alcoholic Beverages, Tobacco and Kola account for 1.1 percent of total index, Communications for 0.7 percent and Recreation and Culture for the remaining 0.7 percent. This page includes a chart with historical data for Nigeria Inflation Rate.

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