Border closure, lower interest rates and increased liquidity may have conspired to increase inflation rate further for the fourth time this year.
A survey Financial Derivatives Company Limited, suggests that, inflation may rise from 11.61 per cent it stood in October to 11.88 per cent in November, a 27 basis points (bps) increase.
The survey made available on Wednesday stated that, “based on our survey, headline inflation for November is projected to increase to 11.88 per cent from 11.61 per cent in October. In the last six months, headline inflation has increased for three months. If our projections are accurate, it will be the fourth month of rising inflation.
“In recent times, there have been more factors stoking inflationary pressure, despite the recent growth in output recorded in third quarter of 2019 (2.28 per cent).
“Factors such as the border closure, lower interest rates and increased liquidity have impacted negatively on the consumer price index.
FDC said the border closure has led to a spike in the prices of commodities such as rice, chicken, and turkey while lower interest rates are a disincentive to save. The average yield on Treasury bills is now 4.24 per cent below headline inflation, resulting in negative real rate of return. The result is that people are likely to spend rather than save. This has increased the demand for goods. The level of liquidity has also increased as reflected in the 3.95 per cent increase in the credit to private sector.
“Although, the Central Bank of Nigeria (CBN) have achieved the dual objectives of lower interest rates and higher loan extension to the private sector, heightened inflationary pressures and the steady depletion of the external reserves could trigger a change in policy in the near term”, said FDC.
Month-on-Month inflation is expected to stay flat at 1.06 per cent. The month-on-month inflation (a more relevant measure of prices) is projected to remain (13.49 per cent annualized) in November.
Commodity prices moved in different directions in November, while tomatoes and pepper declined, garri and rice recorded price increases.
Money supply is a key determinant of the general price level. In October, M2 grew at an annualized rate of 2.07 per cent to N27.63 trillion.
“We anticipate a further increase in broad money supply in November as banks increase lending to credit worthy customers in a bid to meet up with the CBN’s 65 per cent Loan to Depoosit ( LDR) directives.
In November, the Open Market Operations (OMO) maturities surpassed total OMO sales (N849.31 billion), resulting in a net inflow of N1.05 trillion.
While the anchor rate (MPR) has been left unchanged at 13.5 per cent per annum since March 2019, the CBN’s unorthodox policies have seen lending rates declined by an average of 400 basis points in the last four months. Lower interest rates incentivize consumers and corporates to borrow more, thus increasing the amount of money in circulation. This is evidenced by the spike in credit to the private sector to N25.80 trillion in October from N24.82 trillion in August. Currency in circulation increased to N2.06 trillion in October from N2.02 trillion in August.
According to the report, exchange rate was relatively stable across all market segments in November. At the parallel market, the naira traded between N359/$-N360/$. Exchange rate stability is expected to have a positive impact on core inflation which is expected to decline marginally to 8.86 per cent from 8.88 per cent in October.
It is expected that commodity prices will increase in the next few weeks due to increased seasonal demand. The increase in price could be further exacerbated by the impact of border closure. In addition, the minimum wage payment especially in Lagos will boost consumer disposable income and increase aggregate demand. Hence, headline inflation will most likely increase in December.
