Nigeria: Interest Rates Hike Likely As Inflation Hits 19.64 Percent

With the latest increase in the nation’s inflation rate, the expectation is that the Monetary Policy Committee of the Central Bank of Nigeria (CBN) would most likely announce a tightening in the Monetary Policy Rate – official interest rate.

Nigeria’s inflation rate hits all-time high of 19.64 per cent last month (July), according to latest figure by the National Bureau of Statistics (NBS). On a year-on- year basis, the headline inflation rate rose to 19.64 per cent from 18.6 per cent the previous month.

That is Nigeria’s highest inflation rate in 17 years, since 2005.

This, analysts and operators in the real sector say requires urgent action by the fiscal authorities as they say monetary policy alone cannot address the spiraling inflation rate in the country.

In a bid to curb the soaring inflation rate, the MPC had in May 2022 announced a hike in the interest by 150 basis points – from 11.5 per cent to 13 percent – in response to the rising headline inflation. In July when the inflation figure rose to 18.6 per cent, the monetary authorities again increased the interest rate by 100 basis points (14 per cent).

Unfortunately, the rates increase in May and July have failed to permeated enough in the economy to halt the rising inflation.

CBN Governor Godwin Emefiele had while addressing a media conference in Lagos said the bank will still increase the rates if the inflation figure rises again.

Data that was posted by the nation’s bureau of statistics yesterday showed an increase of 2.27 per cent points higher in July, compared to the rate recorded in July 2021, which was (17.38 per cent). This shows that the headline inflation rate increased in the month of July 2022 when compared to the same month in the previous year.

This means that in the month of July 2022 the general price level was 2.26 percent higher than in July 2021.

On a month-on-month basis, the headline inflation rate in July 2022 was 1.817 per cent, which was higher than the rate recorded in June 2022 (1.816 per cent).

The percentage change in the average CPI for the 12 months period ending July 2022 over the average of the CPI for the previous 12 months period was 16.75 per cent, showing a 0.46 per cent increase compared to 16.30 per cent recorded in July 2021.

On a year-on-year basis, in the month of July 2022, the urban inflation rate was 20.09 per cent, this was 2.08 percent higher compared to 18.01 percent recorded in July 2021. On a month-on-month basis, the urban inflation rate was 1.82 per cent in July 2022, this was a 0.0002 per cent decline compared to June 2022 (1.82 per cent). Average urban inflation rate was 17.29 percent in July 2022. This was 0.40 percent higher compared to 16.89 percent reported in July 2021.

Rural inflation rate in July 2022 was 19.22 per cent on a year-on-year basis; this was 2.47 per cent higher compared to the 16.75 per cent recorded in July 2021. On a month-on-month basis, the rural inflation rate in July 2022 was 1.811 per cent, up by 0.002 per cent compared to June 2022 (1.809 per cent).

Food inflation rate in July 2022 was 22.02 per cent on a year-on-year basis; which was 0.99 per cent higher compared to the rate recorded in July 2021 (21.03 per cent). This rise in food inflation was caused by increases in prices of Bread and cereals, food products, potatoes, yam and other tubers, meat, fish, oil, and fat.

On a month-on-month basis, the food inflation rate in July was 2.04 percent, this was a 0.01 per cent insignificant decline compared to the rate recorded in June 2022 (2.05 per cent). This decline is attributed to a reduction in the prices of some food items like Tubers, Maize, Garri, and Vegetables.

The average annual rate of food inflation for the twelve-month period ending July 2022 over the previous twelve-month average was 18.75 per cent, which was a 1.42 per cent points decline from the average annual rate of change recorded in July 2021 (20.16 percent).

Commenting on the latest inflation figures, chief executive of centre for the Promotion of Private Enterprise (CPPE) and former director general of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf said the heightened inflationary pressures in the Nigerian economy remains very troubling.

“The major inflation drivers have not abated, if anything, they have become even more intense. These factors include transportation costs, logistics challenges, exchange rate depreciation, forex liquidity issues, hike in energy prices, climate change, insecurity in many farming communities and structural bottlenecks to production. These are basically supply side issues. Any mitigation measures would have to be situated in the context of these factors.

“The accelerated fiscal deficit financing by the CBN is a significant inflation driver. The financing of fiscal deficit has been elevated to disturbing levels with huge implications for money supply and consequent effect on inflation. CBN financing of deficit is high powered money and very inflationary. It is inflation tax.

“Mounting inflationary pressures weakens purchasing power of citizens as real incomes are eroded, it aggravates pressure on production costs, negatively impacts profitability, erodes shareholders value and undermines investors’ confidence.

“In many cases, increases in production costs cannot be transferred to consumers. The implication is that producers are also taking a hit. This is more pronounced where the demand for the product is elastic. These are products that consumers can readily do without.

“Tackling inflation requires urgent government intervention to address the challenges bedevelling the supply side of the economy and the moderation of fiscal deficit monetisation.” He stated. Also chief executive officer, Global Analytics Consulting Limited, Tope Fasua, stated the need for government to focus on solving the rising inflation in order to avoid “armaggedon”.

According to him the effect of the fast rising inflation is “devastating given the slowdown of GDP growth as the world expects another global recession. The increases in base interest rates have not helped at all as borrowing is a lot more expensive thus making life incredibly hard for companies. The danger we face as individual is that of a spiralling stagflation as incomes stagnate and inflation continues to feed itself in that spiral. Hyperinflation on one side, recession and wage stagflation on the other. Companies are likely to lay off and cut operations. We need a big discussion on how to avoid armaggedon.”

Head, Financial Institutions Ratings at Agusto& Co, Ayokunle Olubunmi, who pointed out that inflationary pressures from electioneering activities is yet to be reflected noted that “the external impact with the challenges in the economy is significantly affecting businesses and unfortunately it is going to be very difficult to tame this kind of inflation because it is not demand pull.

“It is from the supply side assuming it is demand pull then you can use various monetary policies to be able to control it. However for this it has to be the fiscal authorities that has to do something and to now make things worse most of the factors causing the inflation are external induced. Look at the exchange rate.

“It is an open secret that we import almost everything and when dollar is scarce it will automatically translate into the cost of goods unfortunately also we are having security challenge and food production is also affecting us negatively. Apart from food security challenge, with the way the naira is losing value the CFA is getting more valuable than naira so it means it is cheaper for neighboring countries to buy food from Nigeria adding more pressure on food inflation.”

Analysts at Cowry Assets in an emailed note stated that “it is without a doubt to say that several crises across the country have continued to stoke inflation numbers in Nigeria. Some of which are: the on-set of the geopolitical unrest in eastern Europe, which has added another layer of inflationary pressure majorly through grains and energy prices; the pass-through effect from the increase in the international crude oil prices and the momentary scarcity of fuel across cities in Nigeria have seen a relatively upward adjustment in the prices of petrol in the past months and this has shown its inevitable effect on transportation prices.

“With the expectation that the pace of global inflation will begin to taper from September 2022 as a result of post-harvest supplies, we believe the that the monetary policy tightening effect by the Central Bank will permeate the economy and reflect on the inflation numbers which will bring about a slowing momentum in spiraling prices. Thus, we project inflation in August to stand at 20.47 per cent year on year.”

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