Wednesday, March 16, 2016 08:53AM /FBNQuest Research
The opposition of the CBN and the MPC to devaluation is partly based on the impact upon inflation. They have resisted the adjustment to the exchange rate, and headline inflation has still accelerated to 11.4% y/y in February from 9.6% the previous month.
If they had devalued, inflation would also have picked up to reflect the new rate. The challenge for policymakers is that acute fx shortages have fed into inflation and would not be transformed by a devaluation. The gap between fx supply and demand has grown too large.
Inflation accelerated for all NBS categories other than restaurants and hotels. The increase in the electricity tariff with effect from 01 February was clearly a domestic factor.
The greater influence was the fx shortages. Imported food prices accelerated by 13.2% y/y in February. Access to fx at the CBN sales covers no more than 15% of estimated demand, so importers either tap the parallel market where possible or be patient. In the first case, their import costs soar; in the second, inflation is driven by shortages of goods and services.
The MPC would generally have been expected to hike at its meeting next week, given that the headline rate has risen above the policy interest rate of 11.00%. However, it also has to contend with the very poor GDP numbers for Q4 2015 and the prospect that the current quarter will be no better. Some official clarification on the inflation objective would be welcome.
The rise in inflation should be reflected in bids at the DMO auction today.