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Home Opinions Blurb

5 reasons why the CBN may not meet its 11% inflation target

Onome Ohwovoriole by Onome Ohwovoriole
June 14, 2017
in Blurb, Markets
An Ugly Data Showed Up In March Inflation Report

Food Inflation - Month on Month and Year on Year

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Central Bank Governor, Godwin Emefiele speaking at a hearing organized by the Senate, said the CBN was targeting 11% inflation rate by year end. In theory, this should be good news for borrowers as a reduction in inflation rates, should lead to a fall in interest rates. Unfortunately, this may not be the case for the following reasons.

Electricity tariffs – Likely increases in both electricity tariffs and petroleum prices could lead to an increase in the inflation rate in the near to medium term. The two items constitute a part of the basket of goods that are measured for inflation. Electricity tariffs are being reviewed due to increases in inflation, exchange rates and gas prices. The 40% increase in electricity tariffs in February 2016 is often cited as the major reason for the spike in inflation rate last year.

Fuel price increase – Petrol prices are also likely to increase as the Nigerian National Petroleum Corporation (NNPC) has showed signs of its unwillingness to continue with its indirect subsidy of petrol. Petrol prices have gone up because global crude oil prices have rebounded. Studies have shown that the drivers of Nigeria’s inflation rate are cost push, not demand pull. As long as costs remain high inflation will not trend lower.

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Government lending – The Central Bank on the instruction of the Federal Government is also not helping matters. The government has ratcheted up its borrowing since the start of the economic crisis in 2015 effectively crowding out the private sector. In order to maintain buyers appetite, the apex bank would have to maintain interest rates at current levels.Government yields now sell at yields of between 18% to 22%.

Monetary Policy – At 14%, the CBN’s benchmark monetary policy rate suggest a dovish policy is at least not on the cards. The CBN through its daily Open Market Operations (OMO) has borrowed at rates exceeding 18%. Analysts point to the OMO rates as an indication that the CBN was not yet ready to reduce lending rates. Paying higher for mopping up cash is an indication that the CBN is determined to maintain the value of the naira than curtail lending rates. Whilst, this typically has a positive effect on inflation on the long run, the damage may be done before it materializes.

2017 Budget – This week’s signing of the 2017 budget also poses a risk to inflation. The Executive and National assembly have promised that the 2018 budget will be passed this year. That means the 2017 budget will run for just six months. Increased spending by the Federal Government, and other tiers of government as crude oil prices recover are another threat to low inflation rates. The statement by the CBN governor, at the end of the day may have been to calm the Senators.

Tags: CBN Nigeriainflation rate
Onome Ohwovoriole

Onome Ohwovoriole

Onome Ohwovoriole has a degree in Economics and Statistics from the University of Benin and prior to joining Nairametrics in December 2016 as Lead Analyst had stints in Publishing, Automobile Services, Entertainment and Leadership Training. He covers companies in the Nigerian corporate space, especially those listed on the Nigerian Stock Exchange (NSE). He also has a keen interest in new frontiers like Cryptocurrencies and Fintech. In his spare time, he loves to read books on finance, fiction as well as keep up with happenings in the world of international diplomacy. You can contact him via onome.ohwovoriole@nairametrics.com

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Comments 1

  1. Anodebenze says:
    June 14, 2017 at 12:04 pm

    Let the cbn provides the details.a high bank interest is a way of controlling the means of production in the wheel of production.the question now is why is inflation is raising in Nigeria and why it is not working in Nigeria.a high bank interest in Nigeria will work only this way in Nigeria for business men ,investor,trader or business company will do or act in about 3 ways. (1) they will shelve any business venture or any expansion (2) they will looks for alternative means of funding,if a business man have a vision and smart,he can avoid this high bank interest e.t c in other words a high bank interest can be 50/50 % effectively in Nigeria.
    The main problem is that we do not have an effective national assembly that will introduces critical thinking in the executive arm of the govt to pressurizes the executive arm of the govt.methink the cbn cannot bring inflation to 11 % with this plan,but can work next year as the govt have raised about 3 trillion naira secured this year to be spend maybe late this year,to be fully spend next year,as the govt have generated enough revenue to support the economy in facilities,infrastructures and they have clean the economy a little bit,i.e the economy will have more freedom and choice as there is a little of competition in the economy by next year

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