Inflation Rate: Odds Still Against Lower Interest Rates, Say Experts

 Goods in  Lagos marketThe recent downward trend in the current inflation figure notwithstanding, informed economic players have argued against the call for lower interest rates as the Central Bank of Nigeria’s Monetary Policy Committee meets next month.
According to the National Bureau of Statistics, inflation eased from 9.5 percent in February to 8.6 percent in March, the lowest in almost five years, as the impact of higher fuel prices a year ago fell out of the calculation.

However, analysts of the positive economic trend told THISDAY at the weekend that given the unsustainability of the current inflation rate, the pressure on the CBN to cut interest rates at the next MPC meeting is unjustifiable.
The pessimism over the likelihood of a cut in the rates was informed by the realisation that the latest inflation rate may not be a true reflection of the current situation since the fall was due to a substantial base effect (last year, in March, core inflation accelerated to 15% y/y from 11.9% in Feb 2012).

The base effect relates to inflation in the corresponding period of the previous year, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmetically give a high rate of inflation now.

On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the price index now will show a lower inflation rate.
In her reaction to the latest figures from the NBS, Regional Head of Economics, Africa, Standard Chartered Bank Razia Khan said emerging fundamentals in the national and global economic scenes do not support the anticipated calls for a rate cut.

She said: “No doubt, the better-than-expected print – which reflects in part the overall stability in the foreign exchange rate seen in recent months – will lead to new calls for interest rate easing.  Should the improvement in inflation be sustained, then the risk of any easing is certainly higher.

“However, the recent decline in the oil price remains a key risk factor.  With Bonny light (which trades closely to Brent) now below $ 100/bbl, investors are likely to be paying very close attention to Nigeria’s oil sensitivity. Any emergence of pressure on the FX rate might complicate the inflation outlook, and keep the CBN on hold a while longer. “

The Standard Chartered chief said there is need to watch the patterns of excess crude account disbursement and the political scene before the CBN rushes to any decision on the rate given the likelihood of politicians to throw money around in preparation for the 2015 election, a development which she feared could put pressure on the nation’s currency, the naira.

“A second risk factor relates to the price outlook once the substantial base effect has run its course.  Although current Federal government spending plans envisage a modest increase in spending overall in 2013, the recently higher frequency of ECA disbursements still bears watching. Any sign that the political risk cycle has returned to Nigeria ahead of 2015 will require additional caution from the central bank.  In other words, policy shouldn’t just be about the inflation outlook in the next month or two – the outlook on a two-year horizon should arguably be more important.  The case for sustained easing may not yet be that clear-cut,” she suggested.

Similar sentiment was expressed by the Managing Director, Financial Derivatives Limited, Mr. Bismarck Rewane, who described the 8.6 percent figure released by the statistics bureau as unsustainable.
“The 8.6 percent inflation rate for the month of March is not sustainable because the rate will rise gradually when the figures for the month of April are ready because the base year is already over.
“We also need to note that apart from the fall in oil price at the international market, crude oil production has also reduced,” he said.

In her reaction, Renaissance Capital’s Sub-Saharan Africa Economist Yvonne Mhango said, “Weak credit growth and the softening of inflation in 1Q13 may add to arguments to cut the MPR and/or reduce the cash reserve requirement at the next MPC meeting in May. However, the slowdown in the buildup of foreign exchange reserves in recent weeks, downside risks to oil production and the recent drop in the international oil price, have increased the risk to the naira and are likely to keep the MPC from easing policy in the near term. Our YE13 MPR projection is 11%.

“We think the slowdown in inflation in March was largely due to a high base effect rather than smaller price increases. This slowdown was largely broad-based – food inflation slowed to 9.5% YoY in March (vs 11.0% YoY in February), while core inflation (which strips out farm produce) dropped to 7.2% YoY, from 11.2% YoY. The sharper slowdown in core inflation was partly due to a fall in clothing and footwear prices,” she said.

Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, explained that, “the reduction in inflation is still significantly due to the base effect of higher inflation in 2012. However, unlike the earlier months in 2013, the moderation in all categories of inflation suggest underlying decline in prices in real term. This development would have necessitated a reversal of the tight monetary policy but the expanding monetary aggregates, rising pressures on Naira exchange rate and threats to fiscal sustainability would prevent such action.”

The CBN has kept its benchmark policy rate at a record 12 percent for nine consecutive meetings to keep prices in check and bolster the naira. The inflation rate has been below 10 percent, matching the central bank’s target, for three consecutive months.

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