The Consumer Price Index (CPI) measuring inflation in the Nigerian economy has risen to its highest point of 16.5 per cent since 2005, reflecting the rising cost of goods and services in the country.
The National Bureau of Statistics (NBS) yesterday released the consumer price index for June, which rose by 0.9 per cent from 15.6 per cent in May to 16.5 per cent, as analysts say they do not expect the Monetary Policy Committee (MPC) to react to the rising inflation at its next meeting holding next week.
The MPC of the Central Bank of Nigeria (CBN) is expected to meet next week to decide on the direction of the country’s monetary policy.
The increase, which is the fifth in a row, reflected higher prices for electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road, fuels and lubricants for personal transport equipment, which recorded the highest increases, the NBS said.
The present rate of inflation would add pressure on policy makers to increase borrowing costs.
The International Monetary Fund (IMF) said Nigeria’s economy could contract this year for the first time in more than two decades as a fall in oil revenue and electricity shortages weigh on output.
Gross Domestic Product (GDP) contracted by 0.4 per cent in the three months through March as the naira peg and restrictions on trading foreign currency led to a shortage of dollars needed to import fuel and materials for manufacturers.
The CBN, which kept its benchmark rate at 12 per cent in May, will announce its next policy decision on July 26.
“Year on year, energy prices, imported items and related products continue to be persistent drivers of the core sub-index. The core index increased by 16.2 per cent in June, up by approximately 1.2 per cent points from rates recorded in May (15.1 per cent).
“During the month, the highest increases were seen in the electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road, and fuels and lubricants for personal transport equipment,” NBS said.
Ahead of the MPC meeting, Olakunle Ezun, an analyst at Ecobank Transnational, stated that it would not be appropriate for the MPC to tighten monetary policy as the country is already in recession and an increase in benchmark rate would further choke the economy.
He stated that rather, the fiscal authority should seek out ways to take the economy out of recession by taking proactive measures.
“I don’t think it will be appropriate for the MPC to react with a hike based on the level of the inflation rate. Taking a second look at the items that are driving the rise in inflation, they are basically not monetary issues. It depends on how much the fiscal authority can respond to the imbalances that we have today in the economy”.
Likewise, the Managing Director and Chief Executive of RTC Advisory Services Limited, Opeyemi Agbaje stated that inflation is expected to continue to trend downwards as factors that contribute majorly to the pressures have panned out already.
Also, yesterday, naira forwards rose to record highs and volatility surged after the CBN ended a rule capping the difference, or spread, between bids and offers in the foreign-exchange interbank market at 50 kobo, to allow liquidity levels determine the value of the naira as a way of increasing supply to the market.
The CBN’s removal of the limit on bid-offer spreads in the foreign-exchange market raises expectations that the currency is set to extend declines as it trades more freely. Three month non-deliverable forward contracts jumped 4.3 per cent to a record N329.5 per dollar, while contracts maturing in a year rose 4.3 per cent to N366.5, also the highest level on a closing basis. One-week historical volatility increased to 26 per cent, compared to an average of 8.6 per cent over the past year, according to data compiled by Bloomberg.
While the naira weakened 1.1 per cent to 287.5 versus the dollar in the spot market, having swung between 280.22 and 293.38, little trading took place, according to David Willacy, a currency trader at INTL FCStone Limited.
The value of the naira had begun to depreciate last week declining to N292 to the dollar due to liquidity issues.
According to Ezun, the N280 range of the naira was not a true reflection of the liquidity status of the market.
He noted that the removal of the cap had resulted in the volatility experienced by the market, saying, “The spread was used to make prices move within a defined range, which is not good. The expectation is that central bank will allow the market to trade freely by removing the spread and letting liquidity determine the rate.”
The naira depreciated 29 per cent against the dollar last month after the CBN ended a 16-month peg of N197 per dollar. That and the capital controls used to defend it led bond and stock investors to flee the country and exacerbated an economic crash caused by the fall in oil prices from mid-2014. The economy contracted in the first quarter and is likely to shrink over the whole of 2016, the IMF said last week.
Few investors have returned to Nigeria’s markets since the devaluation and many think the exchange rate needs to weaken further to reflect its true value. Importers of items such as glass, textiles and rice are still banned from using the interbank market to buy hard currency and are forced on to the black market, where the naira trade has declined to N365 per dollar.
Culled from leadership