The continuous need to stimulate the economy to address disruptions caused by the Coronavirus (COVID-19) pandemic is likely to push the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) into leaving interest rates unchanged at the end of its meeting today despite the country’s rising inflation, financial analysts have said.
Last Friday, the National Bureau of Statistics (NBS) released data, which showed that annual inflation in Nigeria rose for a 10th straight month in June, lifted by higher food and healthcare costs. Inflation climbed to 12.56 per cent, its highest level in more than two years, from 12.40 per cent in May, the NBS said.
A separate index for food, which accounts for the bulk of the inflation basket, showed a price increase of 15.18 per cent from 15.04 per cent in May, the highest since March 2018.
According to analysts, while inflation’s upward trajectory will be a major consideration at the MPC meeting, the committee is likely to trade economic growth for rising inflation.
In a note obtained by New Telegraph yesterday, analysts at Financial Derivatives Company (FDC) forecast that the “MPC will maintain status quo.” Also, analysts at Proshare stated at the weekend that “the CBN’s price stability function has been thrown into confusion.
The need to stimulate the economy to combat the job losses, manufacturing shutdowns and logistic disruptions caused by COVID-19 has made it difficult for the CBN to tighten the money supply. With the fiscal authorities looking for money to maintain acceptable levels of domestic production despite the health challenges, the CBN is patched into an inevitable policy support response regardless of rising domestic inflation rates.”
Continuing, the analysts said: “The economy recorded a growth rate of +1.87 per cent in Q1 2020, lower than the +2.1 per cent in the contemporary period of 2019 and much lower than the +2.55 per cent by the end of the previous year.
COVID- 19 has disrupted several activities in sectors such as the oil & gas sector, the fast-moving consumer goods sector (FMCGs), and the banking sector. The Central Bank’s Monetary Policy Committee (MPC) meeting may need to confront the headwinds that are billowing.
“The CBN will need to face the task of designing a monetary policy that maintains price stability as well as promotes economic growth.
The CBN’s top agenda at the MPC meeting would be to mitigate the rising inflation rate amid the pandemic without adversely affecting growth, this is like running a hundred-metre dash with feet tied.”
The financial experts predicted that the CBN could reduce the Cash Reserve Ratio (CRR) to increase domestic money supply to the real sector while leaving other policy indicators unchanged.
At the last MPC meeting in May, the CBN, citing the need to stimulate the economy, unexpectedly reduced the benchmark interest rate-Monetary Policy Rate (MPR) to 12.5 per cent from 13.5 per cent.