As the CBN’s Monetary Policy Committee gets set to meet on Mach 21 and 22 they will have their minds firmly occupied with the latest inflation figures. According to the National Bureau of Statistics, February inflation rate came in at about 11.4%.
This is higher than the monetary policy rate (MPR) currently fixed at 11%. The last time we had an inflation rate that was higher than the MPR was in the month of November 2012 when it was 12.3% after which it dropped to 12%. MPR was 12% at the time.
To get an idea of what the CBN might do this time will mean we have to go back to the another period were inflation rate exceeded the MPR. That was the period between June 2008 and September 2011, spanning over three years. Inflation rate was also double digits throughout this period. See chart below;
It took the CBN about 3 years to get inflation below the MPR rate. It also took the CBN 3 years to get inflation rate to single digits. This period also cut between the Soludo and Sanusi years. The CBN had in its communique of October 10, 2010 said that it had adopted “a gradualist approach has been the pattern thus far, given the situation with the banking system and equity markets.” The bank deliberately kept MPR high and squeezed bank’s liquidity ratio and cash reserve requirements to drive money supply low.
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The CBN has a different set of problems in 2010 with the banking sector midwifed out of an imminent collapse. The equities market had just experienced a bad crash and the banking sector was reeling from margin loans which had impacted negatively on their risk assets.
This time the challenge is with navigating through a massive drop in the price of oil and an increase in US Fed rates. The former meant government revenues will take a massive dip affecting Nigeria’s external reserves. This triggered a devaluation of the currency as the CBN had no choice but the rightly price the naira. The latter meant that foreign investors had no choice but to commence a swift pull out of funds from emerging markets including Nigeria.
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These then culminated into another devaluation of the naira as investors pulled out forex in droves negatively impacting on Nigeria’s external reserves. Speculators will also see this as an opportunity to make quick profits imposing further demand pressure on the naira. In response, the CBN opted for severe capital controls that restricted repatriation of forex out of the economy. They also isued a list of 41 imported items that will be excluded from access to forex from the official window. The disparity between the parallel and official rates widened as demand for forex amidst restrictions increased.
The result of all this is a spike in inflation rate as prices of goods and services increased. Nigeria is an import based economy and almost every item produced locally requires at least an imported item as a cost input.
The CBN’s MPR meeting with will interesting.