With New Fuel Price Regime, MPC May Adjust MPR to Suppress Inflation


By Eromosele Abiodun

 Following the introduction of a new fuel price regime by the federal government, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is likely to respond by raising the monetary policy rate (MPR) further in response to inflationary pressure.

Inflationary pressure was largely the premise on which the Committee hiked rate at its last meeting in March, analysts at Eczellon Capital Limited stated in a report

The next MPC holds 23rd and 24th of this month. The Consumer Price Index (CPI), which is used to gauge inflation rose to 12.8 per cent in March. The CPI figures are expected to be released this week.

The federal government last Wednesday announced a new fuel price regime and adjusted the price of petrol, from N86.50 to a band of N135-N145.

According to  analysts, “We opine that the nation’s inefficient foreign exchange market is the underlying driver of the current inflationary pressures in the country. Thus, a comprehensive review and restructuring of the forex market will go a long way in addressing the current economic challenges bedeviling the economy as oppose to a mere increment in the MPR.”

The firm stated that the implication of the new fuel price regime would be further erosion in the real disposable income of the average Nigerian which should impair the sales volume of consumer facing companies/industries.

“Nevertheless, we see all these as being short term pressures which should whither down as the price of petrol balances and finds a new equilibrium position. Such equilibrium position will be bolstered by enhanced supplies from domestic refineries as the recent move by the government will accelerate the set-up of refineries in the country in the medium to long term,“ they added.

The analysts, however, stated that the new pricing regime puts the price of petrol near current market realities and kick-starts the process of finding an enduring solution to the perennial challenges of petroleum scarcity in the country.

They said: “Likewise, the recent decision may also be an indication that the government is now willing to fine tune its economic policies after the dismal performance of its earlier stance on petroleum prices and the value of the naira. Recent comments attributed to the Vice-President, Professor Yemi Osinbajo on the likelihood of the FG allowing for flexibility in the pricing of the naira anytime soon also attests to this.

“While all these seem interesting and positive, the key impact point of the recent petroleum policy will be on the general price level of goods and services in the country. We believe a significant shift in prices will stem from further fall in the value of the naira as heightened demand for foreign exchange by oil importers from the parallel market will lead to a higher equilibrium price in that market compared to the N320-N323/$ it has hovered around in recent times.”

On their part, analysts at Afrinvest West Africa Limited stated that they anticipated the price review to mount further pressure on May inflation numbers.

“We see inflation rate in April at 13.6 per cent year-on-year and expect further increase in May driven by transport division and electricity, gas and other fuels which both contribute 23.2 per cent to the CPI weighting.

“Real consumption spending growth may also be dragged by the hike but we believe gains in productivity from petrol availability will partially offset in the short term while budget implementation will unlock more benefits in the medium term,” they added.