Analysts and stakeholders have called for monetary easing by the Central Bank of Nigeria as the average inflation rate forecast for 2013 is in single digit, Ademola Alawiye writes
Efforts by the Central Bank of Nigeria to attain a single-digit inflation rate finally came to pass last week as the Nigeria Bureau of Statistics announced an inflation rate of nine per cent for January. Apart from the announcement by NBS, inflation forecast for 2013 has is for a single digit on the average.
The World Bank in its forecast foresees Nigeria’s inflation rate easing to single digit this year. Analysts at First Security Discount House in a report on the year 2013, forecast that average inflation rate for the year is 8.5 per cent. Similarly, emerging market strategists at Standard Bank London projected that inflation might fall to 6.1 per cent year-on-year in March 2013.
Data released by the National Bureau of Statistics last Monday showed that inflation rate fell to nine per cent in January from 12 per cent in December last year. It also showed a decline in the food price sub-index, which fell to 10.1 per cent from 10.2 per cent in the period under review. This is the second consecutive month of decline in prices since September 2012.
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of a currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money, a loss of real value in the internal medium of exchange and unit of account in the economy.
The NBS said the relative moderation in the headline index in January was helped by declines in seven out of the 12 United Nations Classification of Individual Consumption by Purpose divisions, as well as declines in major Food and Core sub-indices.
It said the composite CPI increased by 0.62 per cent month-on-month from index levels recorded in December 2012, while urban inflation rate eased to 9.2 per cent year-on-year in January, representing a decrease of 5.2 percentage points from the 14.5 per cent recorded in December.
Analysts, however, believe it was high time the CBN started loosening its tight monetary policy.
The Chief Executive Officer, Fatrax Securities Limited, Dr. Wale Ositelu, said the CBN should consider reducing interest rates to stimulate medium-to-long-term economic growth.
“One will expect the CBN to reduce its benchmark lending rate at the next Monetary Policy Committee meeting in March. If the CBN maintains the current monetary stance, the possible impacts of these measures in the money market and on the fixed income securities will lead to the following: tightness in the money market; increased volatility in the inter-bank rates as the rate maintain upward trends; yields on the money market instruments will increase; new bonds in the market will command higher coupon rate, while the re-opening will command higher marginal rates; and temporary appreciation in the value of naira,” Ositelu said.
Speaking in the same vein, the Managing Director, Sotice Investment Company Limited, Mr. Adedayo Toluwase, said the reduction in money supply through an increase in banks’ Cash Reserve Ratio without an attendant reduction in the benchmark interest rate had an adverse effect on economic activities.
He said, “The reality of the current economic and business conditions is a cause for concern – escalating unemployment crisis; profit margins are declining; consumer demand is weak; prohibitive interest rates; decelerating economic growth and high mortality rate of small businesses.
“Hence, the CBN should make a quick reversal of its monetary policies.”
Notwithstanding the forecast, the CBN has said it will not bow to pressure to reduce the benchmark lending rate at the expense of economic stability.
In fact, the Governor, CBN, Mr. Lamido Sanusi, at the fourth annual investors’ forum organised by Renaissance Capital, said the bank was not in a hurry to loosen its stance on monetary policy, citing the need to ensure economic stability.
He explained that the banking sector watchdog did not want to send a signal that the restrictive monetary policy regime was over by lowering interest rate.
The MPC, which determines interest rate, had in the past one year kept the MPR at 12 per cent, which some analysts, manufacturers and industrialists believed was not favourable to them. Also, the CRR and the Liquidity Ratio are currently at 12 per cent and 30 per cent, respectively.
Sanusi said, “Since the last three MPC meetings, there has been this orchestrated attempt in the run up to the MPC to intimidate and harass us into lowering interest rate. As I explained to people, it is very easy to take stability for granted. Why we are no longer dealing with banking system that was on the verge of collapse, external reserves that was crashing, with multiple exchange rates and inflation at 15 per cent, it is nice for people to be complaining whether interest rate should be 50 basis points or 100 basis points lower.
“We are not going to take stability for granted. The message is that we are not in a hurry to loosen interest rate until we are satisfied that there will be no risk to stability. We are not in a hurry to send a signal that a tightening policy is over, only to turn around at the next MPC and raise interest rate. So, we have chosen to stay on the side of caution so that people would manage their expectations.”
He added that the MPC did not react “because of what we are told in the newspapers to do,” adding that “the crescendo will probably continue and we are cautious obviously on the impact of high rate on those borrowers that have access to credit.”
The CBN boss, however, disagreed with the allusion that the high rate of interest was the major reason why companies did not have access to credit. This, he blamed on the structural imbalance in the economy.
He said, “You can’t lend to a manufacturer who does not have electricity; because without electricity, his business will not thrive. Low interest cannot compensate for bad infrastructure, low interest rate will not compensate for uncompetitive labour. So, we have to continue to address the structural issues for us to have access to credit.
“Some of the slowdown you saw in Gross Domestic Product was as a result of structural issues and not as a result of the tightening. That basically is it. Monetary policy is now very boring and that is how it should be. Monetary policy should be boring, everything shouldn’t be about banks.”
The MPC in March will hold its second meeting of the year where it is being expected that the committee will reduce rates.