Moderating Inflation Rate – Any Policy Response?

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Friday, May 10, 2019 06:13PM / FSDH Research

 

There is good news for consumers and the Nigerian economy, as FSDH Research expects the inflation rate for the month of April 2019 to drop further to 11.23% from 11.25% recorded in March 2019. The drop in the ination rate is due to the fact that the Consumer Price Index (CPI) increased more slowly in April 2019 than it increased in the corresponding period of last year. The bad news, however, is that the month-on-month increase in April 2019 was the fastest increase recorded since October 2018. Given the consistent drop in the ination rate since January 2019, will the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) drop the Monetary Policy Rate (MPR) further when it meets on 20-21 May 2019? 

Throughout the last two years, inflation rate peaked at 18.72% in January 2017. The harsh macroeconomic environment, which put pressure on the value of the Naira, was responsible for the hike. However, the Nigerian economy has recorded relative improvements in the last few months. The increase in the price of crude oil above US$70/b, relative accretion to the external reserves above US$44billion, stability in the value of the currency, successful conduct of general elections, and efforts to improve infrastructure in the country are responsible for the improvement in the economy. FSDH Research however notes that this growth is fragile and highly susceptible to developments in the international market. 

The price monitor that FSDH Research conducted on food and non-food items shows that prices moved in an upward direction in April 2019 compared with March 2019. Acursory look at prices of food items in the international market also suggests that prices of most items increased in April compared with March. On the other hand, the value of the Naira appreciated marginally against the Dollar in April. This marginal appreciation in the value of Naira in April, coupled with the increase in the prices of food items in the international market, may have reduced some of the pressure on the prices of consumer items in Nigeria. The value of the Naira at end-April was N360.40/US$ compared with end-March at N360.47/US$ indicates that the value of the Naira strengthened by N0.07. 

Although the declining inflation rate is still higher than the 6%-9% target of the CBN, it has supported the low yields currently available in the fixed income market. The MPC members may be inclined towards reducing policy rates, however, FSDH Research believes the short-term outlook of the global economy remains uncertain and may not sustain strong growth in crude oil prices. Therefore, a cautious approach to the conduct of monetary policy is appropriate, given the current situation. The Nigerian economy has recorded relative improvements in the last few months. FSDH Research believes the short-term outlook of the global economy remains uncertain and may not sustain strong growth in c rude oi l prices. Therefore, a cautious approach to the conduct of monetary policy is appropriate, given the current situation.


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