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.
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.