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Inflation: CBN, World Bank on collision course

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Further MPR hike could be detrimental to Nigeria's economic growth - Investment banker

Arguments against continuous monetary policy tightening by the Central Bank of Nigeria (CBN), as a sure way of reining in inflation has received international boost, with the World Bank toeing the same line in its latest report.

The global lender had in its latest Global Economic Prospects titled, “Growth Stabilizing But at a Weak Pace” on Wednesday, stated that monetary tightening by the banking sector regulator may not rein in inflation and remains a risk to Nigeria’s growth outlook.

This is, however, the reverse of the position of the International Monetary Fund (IMF) in April last year. The Fund had, while releasing the World Economic Outlook report the IMF/World Bank Spring meetings in Washington DC, urged the apex bank to continue to tighten monetary policy rates to rein in inflation.

“And one of our main recommendations is to tighten the monetary policy to ensure that this inflation comes down towards the more target levels”, IMF had stated.

Nigerians have continued to bear the brunt of economic policies undertaken by the current administration, including the removal of fuel subsidy and subsequent unification of the foreign exchange windows.

In response to these, the apex bank engaged in a bullish monetary policy tightening spree. The Monetary Policy Committee (MPC) had raised the Monetary Policy Rate by 600 basis points from 18.75 per cent to 22.75 per cent, shortly after CBN Governor, Yemi Cardoso, assumed office.

This was followed by another 200 basis points hike and a further 150 bps increase to reach 26.25 per cent.

The naira has also experienced a decline of almost 100 per cent, depreciated to close 2023 at N907/$. In 2024, the naira has further weakened to around N1400/$ reaching a peak of about N1,900/$ around February.

Although the CBN stated that the hike in MPR was necessitated by the urgent need to tame inflation, that has not materialised.

Nigeria’s inflation rate increased to 33.95 per cent in May 2024 according to the latest data from the National Bureau of Statistics (NBS).

This represents a month-over-month increase of 0.26 per cent points in the headline inflation rate from 33.69 per cent recorded in April, the NBS stated in the Consumer Price Index (CPI) report released on Saturday. The inflation rate in January before the MPR hike was 29.90 per cent.

The CPI measures the average change over time in the prices of goods and services consumed by people for day-to-day living. Between January and May, headline inflation has risen, surging from 29.90 per cent in January to 33.95 per cent in May, representing an increase of 13.5 per cent.

Inflation: CBN, World Bank on collision course

MPR and Inflation

The report added that the inflation rate climbed to more than 28-year high in May on higher food and transport prices.

The report read, “In May 2024, the headline inflation rate increased to 33.95% relative to the April 2024 headline inflation rate, which was 33.69 per cent. Looking at the movement, the May 2024 headline inflation rate showed an increase of 0.26 per cent compared to the April 2024 headline inflation rate.

“On a year-on-year basis, the headline inflation rate was 11.54 per cent points higher compared to the rate recorded in May 2023, which was 22.41 per cent. This shows that the headline inflation rate (year-on-year basis) increased in May 2024, when compared to the same month in the preceding year (i.e., May 2023).

“On the contrary, on a month-on-month basis, the headline inflation rate in May 2024 was 2.14%, which was 0.15% lower than the rate recorded in April 2024 (2.29 per cent). This means that in May 2024, the rate of increase in the average price level is less than the rate of increase in the average price level in April 2024.

Also, potatoes, fish and meat contributed to higher food prices. Food inflation quickened to 40.66 per cent in May from 40.3 per cent in April.

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“The Food inflation rate in May 2024 was 40.66 per cent on a year-on-year basis, which was 15.84 per cent points higher compared to the rate recorded in May 2023 (24.82 per cent), the NBS report read.

In recent years, food prices have been on the rise across Nigeria. The situation deteriorated due to the impact of government policies such as the removal of subsidies on petrol, among others.

The upward trend in the prices of these staples and other products has weakened the purchasing power of many citizens, making it difficult for many households in the country to afford daily meals.

Limiting the rate hike

Dr. Muda Yusuf, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, in his submission, said: “My view is that we need to be careful about it. We can’t dismiss it entirely because policy has a role to play in managing inflation.

“Real sector investors are grappling with high costs of diesel, logistics, transportation, and all manner of taxation problems, regulatory issues, and exchange rate depreciation.

“On top of that, you now have this additional problem of increasing the cost of funds; it can be a suffocating situation for businesses. So, that is why the CBN also needs to define the limits of rate hikes. Fighting inflation is the collective responsibility of the monetary and fiscal authorities.

“I’m not saying that the CBN should completely be aloof, but it should not also go to the extreme of making life extremely difficult for operators in the economy.

“Right now, with the latest tightening, the prime lending rate will be 27–28 per cent. That’s the rate for prime customers with high credit ratings. So, you can now imagine the rate at which SMEs will be paying for funds — you are talking about between 30-35 per cent.

“So, if you have that kind of situation, what business can you do in this economy to give you a return of 30 per cent, even a return of 25 per cent? What business? I can’t think of any.”

However, the CBN governor, Olayemi Cardoso has consistently expressed optimism that the various tools deployed by the bank to tame inflation and create a stable foreign exchange market would yield the needed results in the coming months.

“I have several times and I will say again, there is no magic wand. These are things that need to take their time. I am pleased and confident that we are beginning to get some relief and in another couple of months we will see the more positive outcomes from what the Central Bank have been doing”. Cardoso said after the last MPC meeting.

 

 

 

 

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