CBN Tight Monetary Measures Continue to Plummet Inflation

Determined to ensure it continues to plunge the consumer price index and reaches its single-digit rate target by 2018, the Central Bank of Nigeria has continued to retain its tight monetary measures to fight  inflation, writes Kunle Aderinokun

Efforts by the Central Bank of Nigeria to ensure monetary and price stability, which is one of its core mandates,  appear to be yielding fruits as the consumer price index (CPI) has continued to maintain a downward streak. Specifically, the CPI, which measures inflation, increased by 15.91 per cent (year-on-year) in October, representing 0.07 percentage points drop from 15.98 per cent of the previous month. The latest decline in CPI made  it the ninth consecutive disinflation – slowdown in the inflation rate – in headline year-on-year inflation since January 2017, according to the National Bureau of Statistics, which published  the CPI report recently.

 

Control

CBN has maintained a tight monetary stance with a view to taming inflation and bringing it to a single-digit rate. When in July 2016, it became apparent  that inflation wanted to spiral out of control, the apex bank raised the monetary policy rate(MPR), the benchmark interest rate, by 200 basis points to 14 per cent from 12 per cent, left the cash reserve ratio (CRR) and liquidity ratio unchanged at 22.5 per cent and 30 per cent, respectively, as well as retained the asymmetric window at +200 and -500 basis points around the MPR. And since then, the monetary authority has left the policy rates unchanged at the respective positions to ensure price stability.

Besides, the CBN also introduced  a raft of policies to  bolster its foreign exchange management and ultimately strengthen the value of the naira. 

Shortly before it tightened the monetary stance in July, mid June, the CBN re-introduced the flexible exchange rate regime whereby the market was to operate as a single market structure through the interbank/autonomous window. Also, as part of the framework, the exchange rate was designed to be market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.

Few months after this policy, that is, sometime in April,  the banking regulatory authority consolidated its foreign exchange market reform with introduction of the Investors’ and Exporters’ FX Window. The I & E Window was established to boost liquidity in the FX market and ensure timely execution and settlement for eligible transactions.  The window through which the CBN was recently reported to have intervened to the tune of $18.36 billion has been able to stabilise the exchange rate and converged the parallel market exchange rate and the Nigeria Autonomous Foreign Exchange (NAFEX) market rate.    

Analysis

Though the inflation slowed down, increases were recorded in all COICOP divisions that yield the headline index.

According to NBS, “While average headline year-on-year inflation for the first five months of the year (January to May 2017) stood at 17.45 per cent, average headline year on year inflation for the next five months of the year (June to October 2017), stood at 16.01 percent indicating disinflation from June to date, compared to from January to May 2017. 

“On a month-on-month basis, the Headline index increased by 0.76 percent in October 2017, 0.02 percent points lower from the rate of 0.78per cent recorded in September. This represents the fifth consecutive month on month contraction in headline inflation since May 2017.” 

Further to the foregoing analysis, NBS also revealed that, “While average headline month-on-month inflation for the first five months of the year (January to May 2017) stood at 1.54 percent, average headline month on month inflation for the next five months of the year (June to October 2017), stood at 1.06 percent indicating disinflation from June to date compared to from January to May 2017.”This indicates that while prices have remained high in 2017, they have tended to slow down their pace of increase since May 2017 both on a year on year and month on month basis. 

The percentage change in the average composite CPI for the twelve-month period ending in October 2017 over the average of the CPI for the previous twelve-month period, which has also trended downwards since May 2017 was 16.97 per cent, showing 0.2 per cent point lower from 17.17 percent recorded in September 2017.

Nevertheless, NBS pointed out that, “The Urban index rose by 16.19 per cent (year-on-year) in October 2017, up by 0.01 percent point from 16.18 percent recorded in September and the Rural index increased by 15.67 percent in October 2017 down from 15.81 percent in September 2017. On month-on-month basis, the urban index rose by 0.82 percent in October 2017, down from 0.84 per cent recorded in August, while the rural index rose by 0.72 per cent in October 2017, down from 0.74 percent in September.” 

The corresponding twelve-month year-on-year average percentage change for the urban index, according to statistics agency, was 17.57 percent in October. This was less than 17.87 percent reported in September 2017, while the corresponding rural inflation rate in October was 16.41 per cent compared to 16.52 per cent recorded in September 2017.

“High food price and food price pressure continued into September though generally at a slower pace. The Food Index increased by 20.31 per cent (year-on-year) in October, down marginally by 0.01 per cent points from the rate recorded in September (20.32 per cent). While average year on year food inflation for the first five months of the year (January to May 2017) stood at 18.67 per cent, average year on year food inflation for the next five months of the year (June to October 2017), was higher at 20.22 per cent indicating higher food price inflation on average in the second five months of the year compared to the first five months,” it stated. 

“On a month-on-month basis, the food sub-index increased by 0.85 percent in October, down from 0.87per cent recorded in August. This represents the fifth consecutive disinflation in month on month inflation since a 2017 high of 2.57per cent in May 2017. October 2017 also represents the lowest recorded month on month inflation since September 2016. While average month on month food inflation for the first five months of the year (January to May 2017) stood at 2.01 per cent, average month on month food inflation for the next five months of the year (June to October 2017), stood at 1.27 per cent indicating a general slow-down in the rise in food prices from June to date compared to from January to May 2017, though the rate of price increases has remained generally higher on a year on year basis. 

“The average annual rate of change of the food sub-index for the twelve-month period ending in October 2017 over the previous twelve month average was 19.14 per cent, 0.26 per cent points from the average annual rate of change recorded in September (18.88) per cent. The rise in the food index, in October 2017 was caused by increases in prices of bread and cereals, meats, oils and fats, coffee tea and cocoa, milk cheese and eggs, vegetables and fish,” it added.

 

Views 

Economic analysts expressed no surprise at the continued decline in inflation especially with better management of the economy.  Particularly, the analysts made reference to efficient management of the foreign exchange, improved productivity and generally, relative stability in policy decisions as factors contributing to the continued downward movement  of the CPI.   

The CEO, Global Analytics Consulting, Tope Fasua,  said, “We should expect a measured and gradual deceleration of inflation given a better management of the economy in the short term. Exchange rate management is better now and policy decisions have led to relative stability.”

Noting that, “That aspect of inflationary pressure is basically taken care of,” Fasua, however, added that, “What should worry us is the effect of so called Paris Club ‘refunds’ which are basically monies being refunded to governors by the FG, being over-deductions from state accounts in the 1990s.”

To him, “These monies are being spent with no checks and balances and may  cause excess liquidity in the system. The problems remain on the fiscal side. I’m afraid that even if we achieve the 12 per cent inflationary target for next year a lot of volatility is upfront owing from an unsustainable debt regime.”

Also, Head of Banking and Finance Department, Nasarawa State University Keffi, Dr. Uche Uwaleke,  acknowledged  that the  declining rate of inflation was a positive development for the economy.

Uwaleke suggested that the CBN should sustain the measures it had adopted,  with a view to achieving its target of  single-digit inflation 

“Although food inflation fell slightly from 20.32 per cent in September to 20.31 per cent in October, food prices are still high due to supply shortages caused by low access to fertiliser and insecurity, especially farmers-herdsmen clashes.

“With headline inflation trending downwards since February this year, I have no doubt that, barring any unexpected shock such as sudden drop in crude oil prices, increase in pump price of fuel or electricity tariffs, the single digit target of the CBN will likely be met,” he posited.

In the same vein, Executive Director, BGL Capital Ltd, Femi Ademola,  believed, “The inflation is behaving in line with consensus expectations although still higher than our expectation.”

According to him,  “At the beginning of the year, we suggested that two factors will mitigate inflation upside in 2017; the base effect and curtailed demand due to recession. Hence we projected an average inflation of below 15per cent in 2017. While inflation  has been on consistency decline since March 2017, especially the month on month inflation rate that is now below 1per cent, the headline inflation remains strong at close to 16per cent.”

“Be that as it may, we have recorded a consistent decline in inflation due to several reasons including stable and more liquid foreign exchange market, improved productivity and the commencement of the harvest season; all in addition to the high base effect,”  Ademola added.

 

Outlook

Going forward, Ademola reasoned that, if the aforementioned  conditions remain the same, “We could expect to see a lower inflation rate in the early 2018 despite expected increase in prices during the festive season.”

Similarly, in their  estimate, analysts at United Capital Ltd projected that inflation would decline further to 15.70 per cent in November, with continued stability in the FX market, coupled with expectation of stable harvest season.

“A thorough analysis of the CPI numbers for the month of October indicated that the moderation in headline inflation rate to 15.91per cent was broadly driven by a surprise reduction in the food sub-index which slowed to 20.3per cent y/y and declined 2bps m/m in Oct-17. Additionally, we observed that despite y/y marginal increase in core inflation sub-index to 12.1per cent in Oct -17, the m/m component of the sub-index fell for the fourth consecutive month to 0.8per cent in Oct-17, further supporting the slowdown in the headline rate. Overall, the slowdown in food sub-index is an indication that pressure on food prices continues to reduce. The continued stability in the FX market as well as expectation of stable harvest season should see inflation trend further down in the coming months. We therefore see the headline inflation number moderating to 15.70per cent in November,” they submitted.

But with strong conviction, the CBN Governor, Godwin Emefiele, at the end of the last two-day Monetary Policy Committee meeting in Abuja, said the bank was working hard, with the support of other important monetary and fiscal policy authorities to bring  inflation down to single digit.

“When we talked about exiting recession in the second quarter of this year, many people did not believe. We are optimistic that our forecast to hit single digits by next year will come to pass,” said Emefiele.

The governor believed, “With tenacity, lots of work, aggression and commitment by policy makers (monetary, fiscal and trade), we will get there and in a short time.”

“As policy makers, we cannot rest on our oars. We need to remain focused. For a country that grows her population by an average of three per cent, nothing short of going back to the historical levels of about six per cent would be considered good,” he added.