Inflation: CBN should maintain tight monetary policy – Experts

ABUJA: The inflation figures released last week by the National Bureau of Statistics, NBS, which show that prices of goods and services are still rising, indicate that the Central Bank of Nigeria (CBN) will maintain its tight monetary policy, when its Monetary Policy Committee (MPC) meets today, said financial experts.

Inflation measures the rate of increase in the prices of goods and services people consume every day. It is measured by the Consumer Price Index (CPI). The Inflation figures released by the NBS shows that while  the general rate of increase in prices (headline inflation)  declined to 12.0 per cent in December from 12.3 per cent in November, Core inflation, which is the rate of increase of goods and services excluding farm produce , rose to 13.7 per cent from 13.1 per cent. The increase was attributed to rising prices of essential goods and services like housing, electricity and gas.

According to the Bureau, “The increases in the Core (inflation)  index were as a result of increases in the Housing, Electricity, Gas and other Fuels division, in particular liquid (kerosene) and solid fuels (firewood and charcoal), rental and imputed rent prices, clothing prices, garment prices, and air transport fares.”

Reviewing this development ahead of the MPC meeting today, financial experts said this implies that there are still inflationary threats in the economy, especially the huge budgetary spending planned for this year by the Federal Government hence they expect the CBN to maintain its tight monetary policy.

“In order to adjust monetary policy however, the MPC will need to be more certain that lower inflation can be achieved on a sustainable basis.  With the threat of a higher benchmark crude price being adopted in the 2013 budget, we’re not certain that can be taken for granted for the moment. On this basis, we forecast unchanged monetary policy next week”, said Razia Khan, Head of Regional Research, Africa, Standard Chartered Bank.

Also commenting on the development, analysts at Afrinvest PLC said, “We however believe that the upward review of the oil price benchmark to $79 per barrel as contained in the recently passed 2013 budget, provides additional room for increased government spending and therefore poses a direct upside threat to inflation. We therefore expect the CBN’s Monetary Policy Committee to keep the MPR on hold at its next committee meeting scheduled for early next week.”


“Ahead of the meeting of the MPC next week and existing inflationary threats, we are conscious of the fact that rates might be held at current levels. However, we maintain our position on gradual reduction of the benchmark rate to single-digit levels even as we remain optimistic on the attainment of single digit rate in the current fiscal year,” analysts at Pro share commented.

Since 2011, the CBN has been operating a tight money supply policy, so as to check the rate at which prices of goods and services rise in the economy. Among other things, the apex bank raised the Monetary Policy Rate, which is the benchmark interest rate, six times from 6.0 per cent to 12 per cent. It also raised the Cash Reserve Requirement (CRR) for bank to 12 per cent from 4.0 per cent.

Despite these measures, the inflation brake though fell slightly last year,  has remained in double digit due to impact of the fuel price increase and increased tariff on wheat and rice. From 12.6 per cent in January, inflation rose to 12.9 in June before dropping to 12.3 per cent in November.

The tight monetary policy meanwhile occasioned high interest rate, and made lending to the government more attractive to banks than lending to businesses. This prompted calls by real sector operators and economic experts for a review of the tight monetary policy of the CBN.

Razia Khan, however, said that it is not economically expedient now for the CBN to change to a loose monetary policy.

She said, “I have picked up on some of that thinking, but my first response would be, is monetary policy actually tight in Nigeria? If we take the 12 months smoothed measure of headline inflation of 12.2 per cent in December and the MPR of 12 per cent, it still implies negative real interest rates – that suggests that policy is reasonably accommodative.

“When Nigerians complain about ‘tight monetary policy,’ they are typically complaining about high loan rates, which make it difficult to finance SMEs, and take away from growth. But the reasons behind those spreads have much more to do with fundamental structural factors, than they do with the current policy stance of the CBN. There is a key important distinction.

“Even if the CBN were to relax its monetary policy, (the naira might weaken, inflation would almost certainly be higher), it is not clear that loans would be any more affordable – those spreads might remain in place.  Greater macroeconomic volatility in that instance might even contribute to higher spreads! The best thing that the CBN can do to contribute to more loan growth over time is to ensure macroeconomic stability to whatever extent possible.

“We should also not lose sight of the benefits of CBN ‘tightening’ – lower imports as policy was tightened in July (compare imports in third quarter with second quarter of 2012), higher external reserves. Nigeria has been able to attract more portfolio investor flows as a result. Its index inclusion and the heavy demand for FGN bonds have arguably made it cheaper to finance government spending.

“This helps in a small way to reduce vulnerability to the oil cycle – all because the central bank was brave enough to tighten policy in the face of opposition. The benefits clearly outweigh any perceived costs. So to assume that there might have been a lot more loan growth if the MPR were 50 or 100 bps lower is missing the point somewhat”, the NBS inflation report for December stated.”

In December 2012, the composite Consumer Price Index which measures inflation rose to 12.0 per cent year-on-year (compared to 12.3 per cent in November). On a year-on-year basis, the relative increase in the headline index in December was as a result of higher prices in the Core Index. This is the second consecutive month where the Core index has deviated from the downward trend it exhibited since the month of July, increasing to 13.7 per cent (from 13.1 in November).

On the other hand, food prices moderated during December, giving temporary respite from the lagged effects of the floods which occurred from July to Mid-October, as well as other demand and supply conditions. The Food index increased year on year to 10.2 percent from 11.6 percent in November.

It should be noted that the Headline Index is made up of the Core Index and Farm Produce items. As Processed Foods are included in both the Core and Food sub-indices, this implies that these sub-indices are not mutually-exclusive. In December, the composite CPI increased by 0.75 per cent month-on-month from index levels recorded in November 2012.

The Urban inflation rate was recorded at 14.5 percent year-on-year, a decrease of 1.3 percentage points from the 15.8 percent recorded in November, while the Rural index increased by 0.4 percentage points to 10.2 percent on a year-on-year basis.

On a month-on-month basis, the Urban All-item index increased by 0.8percent from levels recorded in November, while the Rural All Items index increased by 0.7 percent between November and December. The percentage change in the average composite CPI for the twelve-month period ending December 2012 over the average of the CPI for the previous twelve-month period was recorded at 12.2 percent. The corresponding 12-month year-on-year average percentage change for the Urban index was 14.6 percent while the corresponding Rural index remained unchanged at 10.5 per cent.

Food Inflation: In December, the composite Food Index increased year-on-year by 10.2 per cent to 141.2 points. This was 1.4 percentage points higher than 11.6 per cent recorded in November.

On a month-on-month basis, the Food index increased by 1.0 per cent from November to December. The rise in the Food Index was as a result of higher food prices in various classes within the index led by bread and cereals, higher vegetable prices due to the dry season and higher prices of potato, yams, and other tubers.

The higher food prices occurred largely as a result of increases in eight of the eleven food classes.  On a year-on-year basis, the moderation in food prices in December was the first in five months. The average annual rate of rise of the index for the twelve-month period ending in December 2012 was 11.3 percent when compared to the same period in 2011.

Core Inflation: In December, the “All items less Farm Produce” index which excludes the prices of volatile agricultural products increased by 13.7 percent year-on-year. This was 0.6 percentage points higher than the 13.1 percent recorded in November. On month-on-month basis, the Core index increased by 0.7 percent from levels recorded in November.

The increases in the Core index was as a result of increases in the Housing, Electricity, Gas and other Fuels division, in particular liquid (kerosene) and solid fuels (firewood and charcoal), rental and imputed rent prices, clothing prices, garment prices, and air transport fares. The average 12-month annual rate of rise of the index was recorded at 13.9 per cent (year-on-year) for the 12-month period ending December 2012, 0.3 percentage points from the 13.6 per cent recorded in November.”


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