With Rising Inflation, Analysts Foresee Tight Monetary Policy

With Rising Inflation, Analysts Foresee Tight Monetary Policy

Obinna Chima
Analysts at Renaissance Capital have predicted that the strong inflationary pressure in the country will compel the Central Bank of Nigeria (CBN) to tighten its monetary policy stance in 2021.
Precisely, the in

vestment and research firm forecasted a one per cent rate hike because of the weak state of the economy.
Sub-Saharan Africa Economist/Head of Research, Renaissance Capital, Yvonne Mhango, stated this in a note to THISDAY at the weekend.

The Consumer Price Index (CPI), which measures inflation, increased by 16.47 per cent (year-on-year) in January compared to 15.75 per cent in December, according to the National Bureau of Statistics (NBS). The NBS blamed the 0.71 percentage points increase on higher food and commodity prices.

Food prices were the biggest driver of inflation as food inflation surged to 20.6 per cent year-on-year (YoY) in January, from 14.8 per cent YoY a year earlier. Imported inflation was broadly flat in that period as it inched up to 16.7 per cent YoY, from 16.1 per cent YoY.

This, it stated, implied that price inflation of locally grown food was stronger than that of imported food. We infer from this that the impact of increasing security challenges (as well as land border closures and floods in 2020) on food inflation was stronger than that of a weaker NGN.

“Nigeria’s Monetary Policy Committee (MPC) expects inflationary pressure to start moderating as the economy’s negative output gap closes in 2021. We expect structural bottlenecks to keep inflation expectations elevated in 2021. We think naira weakness and the monetisation of the budget deficit will keep inflation in the mid-teens. Our 2021 year-end inflation forecast is 14.5 per cent,” the report added.

The MPC held its policy rate at 11.5 per cent in January, as it believed the policy needed to remain accommodative, alongside that of the fiscal, and to be supported with the central bank’s development finance initiatives.
“We believe strong inflationary pressures will compel the central bank to tighten its monetary policy stance in 2021. We only forecast a one percentage point rate hike because the economy will still be weak.

“We think there is upside risk to this forecast, particularly if the central bank decides to liberalise the forex market. To maintain a stable naira, monetary tightening is likely in our view, over and above any interest rate hikes. A tighter monetary policy stance could undermine the already sluggish growth recovery,” it added.

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