…CBN intensifies liquidity tightening
Nigeria’s headline inflation rate edged closer to 30 percent in December on the back of higher transport costs and weaker naira, even as it remains uncertain when the next meeting of the rate-setting committee of the Central Bank of Nigeria (CBN) will take place.
The inflation rate rose for the 12th straight month to a 20-year high of 28.92 percent from 28.20 percent in November, according to the National Bureau of Statistics.
The Monetary Policy Committee last met in July, when it increased the benchmark interest rate for the eighth straight time to 18.75 percent to tackle rising inflation. The CBN had yet to communicate whether the meeting would be held this month as of the time of filing this report.
“Aggressive interest rate hikes are long overdue to bring inflation under control and also to help the naira achieve some semblance of stability,” David Omojomolo, Africa economist at Capital Economics, said.
According to him, the longer the CBN remains missing in action, the stronger the evidence that President Bola Tinubu’s policy shift is going in reverse.
“At the next meeting, we think that the CBN will need to raise rates by 400 basis points to 22.75 percent, to show that it’s taking the inflation fight more seriously. There’s a clear risk, though, the CBN underwhelms again.”
Omojomolo added that doing so would undermine much of the momentum and optimism around the policy shift that Tinubu started last year.
Olayemi Cardoso, governor of the CBN, defended in November the postponement of the MPC meeting, saying the apex bank had satisfied the statutory requirement of meeting four times in a year.
“For the avoidance of doubt, the CBN Act 2007 requires that the meeting of the MPC of the Bank be held at least four times a year, and the Bank has satisfied this requirement for 2023. Our focus has been on ensuring these meetings are useful and effective,” he said.
He added that the CBN was confident that with continued tightening measures for the next two quarters, it would be able to manage inflation effectively.
“While absolute inflation is still rising, the declining growth rate indicates progress. I am happy to report that our efforts over the past two months have begun to yield fruit,” he said at the time.
The ultimate goals of monetary policy are to control inflation, maintain a healthy balance of payment position to safeguard the external value of the national currency, and promote adequate and sustainable levels of economic growth and development.
The goals are achieved by controlling the money supply to enhance price stability (low and stable inflation) and economic growth.
Money supply, which is one of the drivers of inflation, remains prevalent, with money supply (M3) scaling by an average of 28.8 percent in 2023, the highest growth level seen in over a decade, said analysts at CardinalStone Research in their latest outlook report.
“Aside from the M3, the largest inflationary drivers in 2023 were elevated Premium Motor Spirit and Automotive Gas Oil prices, material currency pressure, and below-average rainfall,” they added.
Inflation in Africa’s biggest economy is higher compared to its peers on the continent. According to statistical agencies, Ghana’s consumer inflation slowed to 23.2 percent in December from 26.4 percent in November, while that of Kenya slowed slightly to 6.6 percent from 6.8 percent.
Zimbabwe’s inflation rate rose to 26.5 percent from 21.6 percent, while Tunisia’s increased to 10.1 percent from 9.8 percent.
“In view of the fact that global and regional inflation has slowed and, in many cases, falling, Nigeria is fast becoming an outlier. More importantly, most analysts are questioning the veracity of the inflation data,” said analysts at Financial Derivatives Company Limited (FDC), led by economist Bismarck Rewane.
They said the answer to this question is not far-fetched because imported inflation has two components: the nominal prices of commodities in the global markets, and the exchange rate effect on domestic prices.
The NBS report revealed that food and non-alcoholic beverages contributed the most (14.98 percent) to the increase in headline inflation in December.
Food inflation, which constitutes 50 percent of the inflation rate, rose to 33.93 percent from 32.84 percent in the previous month. Core inflation, which excludes the prices of volatile agricultural products and energy, stood at 23.06 percent, up from 22.38 percent.
“The rise in food inflation on a year-on-year basis was caused by increases in prices of oil and fat, bread and cereals, potatoes, yam and other tubers, fish, fruit, meat, vegetables milk, cheese, and eggs,” the NBS said.
Brilliant Akpedafe, a Lagos-based production technician, said the prices of food always left him dumbfounded every time he went to the market.
“Last month, I was shocked at the price of a kilogram of chicken, so I opted for fish, but the cost of fish was so overwhelming that I humbly returned to buy the chicken,” he said.
He said he has not reduced his food consumption because if he doesn’t eat properly, he might end up sick and spend money on medications.
“So, I spend more money on food than I used to. I’m hoping things get better soon but it is not looking like it would.”
The International Monetary Fund recently urged the CBN to hike interest rates in the next meeting to address the country’s high inflation rate.
“The central bank, under its new leadership, has started to withdraw excess liquidity that was in the system and contributing to high inflation. The next MPC meeting should further raise the policy interest rate,” it said in a statement.
The Cardoso-led CBN has been consistently tightening liquidity through Open Market Operations (OMO) as part of a strategic move to curb inflationary pressures.
According to the CBN, OMO is the primary instrument of monetary policy under the market-based approach to monetary management in Nigeria, but it is being complemented by reserve requirements, discount window operations, foreign exchange market intervention, and movement of public sector deposits in and out of the deposit money banks.
“CBN [is] now employing orthodox monetary tools for liquidity management,” Bismarck Rewane, managing director/chief executive officer of FDC, said.
The CBN issued an OMO three times in the fourth quarter of 2023 and one in January 2024. Cardoso said the central bank held an OMO auction with a stop rate of 17.5 percent for the one-year tenor, attracting an oversubscription of N350 billion.
On January 11, 2024, the CBN conducted the first OMO sales of the year worth N357.2 billion.
Over the past seven months, the inflation rate in Africa’s most populous nation has accelerated largely on the back of federal government reforms, including the removal of petrol subsidy and naira devaluation.
The World Bank’s latest Nigeria Development Update report revealed that rising inflation and sluggish growth in Africa’s most populous economy increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year.
This means that from January to November, an additional 14.2 million people fell into poverty.
“The Tinubu administration has its work cut out—arresting spiralling insecurity, tackling grinding poverty, enhancing economic opportunity, and forging a sense of national consciousness. It is safe to say that it is not off to a great start,” analysts at SBM Intelligence said in a recent report.
