CBN may increase benchmark interest rates as inflation rises: Analysts

*Experts foresee sustained pressure on consumer prices following the extended weakness in the agriculture sector and increase in electricity tariffs which implementation has commenced in Nigeria January 2021

Alexander Davis | ConsumerConnect

As the country’s as inflation surged by its largest rise in eight years to 15.75 percent, the Central Bank of Nigeria (CBN) may be forced to adjust its hold-down position and increase benchmark interest rates.

It was learnt most analysts said they expected persistent rise in inflation, which may put the Bankers’ Bank in a delicate balance at its next monetary policy meeting next week.

Analysts expect upward review of the benchmark Monetary Policy Rate (MPR), which was retained at 11.5 percent at the last meeting.

Recall the National Bureau of Statistics (NBS) at the weekend released its latest inflation report, which indicated the upward pressure on domestic consumer prices remained unabated for the 16th consecutive month.

Headline inflation rose from 14.89 percent in November 2020 to 15.75 percent in December 2020, the highest since December 2017 and largest increase since January 2012.

Bismarck Rewane’s Financial Derivatives Company (FDC) said the continuing rise in inflation would be a major issue at the Monetary Policy Committee (MPC) two-day meeting of the apex bank, scheduled for Monday, January 25 to Tuesday, January 26, 2021.

The Bank cannot be oblivious to a rate of inflation, which is almost seven percent above the upper limit of its inflation range of between six to nine percent, stated the FDC.

The company said: “It, therefore, may consider tightening before the meeting or symbolically increasing the rates of its special bills, currently at 0.5 percent per annum.”

The firm suggested that it expected increase in the headline inflation in January, a view common among analysts.

Report quoted analysts at Cordros Group, which had correctly predicted the inflation rate for December 2020, predicted that headline inflation would rise to 16.10 percent this month.

Cordros Group outlined that pre-existing structural constraints, continued impact of the marginal hike in electricity tariffs and a relatively low base in the prior year have set up continuing rise in inflationary trend.

Afrinvest West Africa Group also noted that the trend in consumer prices reflects continued weakness in the agriculture sector as the harvest season should normally drive reduction in food prices.

“In the immediate term, we foresee sustained pressure on consumer prices on the back of the extended weakness in the agriculture sector and the increase in electricity tariff, for which implementation has commenced in January 2021,” Afrinvest stated.

According to experts, continued foreign exchange (Forex) shortages and the lingering impact of the 2020 currency devaluation also contributed to the negative inflation outlook in the country.

Nevertheless, they observed that the reopening of land border and the high base effect from last year were expected to moderate inflation going forward.

FDC further stated the 0.32 percent increase in core inflation to 11.37 percent suggested that the spike in inflation was not driven by seasonal factors alone.

Rather, the company stressed that a combination of factors, including the pass through effect of the exchange rate, higher costs of logistics and hikes in electricity tariffs among others.

On the effect of inflation on the Nigerian currency, FDC further noted the Naira had wobbled throughout 2020, partly as a result of a gaping difference between the rate of inflation of 15.75 percent and basement level rate of 0.5 percent per year on 91-day treasury bills.

Kindly Share This Story