Key highlights
- Headline inflation would have hit 30.48% in April 2023 if the primary interest rate had not been pegged at 18%
- The MPC tasked its Research and Monetary Policy Department in the course of the meeting, to evaluate counter-factual evidence from available data using empirical analysis
- The result of the analysis revealed that following each monetary policy rate hike, rise in inflation moderated to what it could have been if the MPC did not aggressively raise rates at all.
The governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, has said the rate of headline inflation would have hit 30.48% in April 2023 if the primary interest rate had not been pegged at 18%.
He said this to stress that the MPC’s hawkish inflation policy was having a positive effect on the fight against inflation, albeit moderately.
According to Emefiele, the headline inflation, in the view of the MPC members remained high, due likely to a host of non-monetary factors outside the reach of the Central Bank such as perennial scarcity of PMS and exploitation of short-term high price of PMS, the high and rising price of many energy sources and a host of headwinds confronting the food supply chain.
What Emefiele is saying
Emefiele said the MPC, in coming up with its 18.5% primary rate was concerned that despite its aggressive stance adopted since its May 2022 meeting, inflation had decelerated towards the banks’ long-run objective. He said the committee noted that the continued rise in headline inflation, although moderate, remained the biggest challenge confronting macroeconomic stability in Nigeria.
- “In the circumstance, the committee enjoins the fiscal authorities to explore other avenues to expand the safety net in an urgent need to improve its ability to respond to legacy and emerging shocks. Non-oil revenues such as the expansion of the tax bracket will enable the reduction of fiscal deficit and public debt to improve the fiscal space.”
- “Confronted by these challenges, the committee tasked its Research and Monetary Policy Department in the course of this meeting, to evaluate counter-factual evidence from available data using empirical analysis. The result of the analysis revealed that following each monetary policy rate hike, the rise in inflation moderated to what it could have been if the MPC did not aggressively raise rates at all.
- “In fact, empirical evidence provided showed that whereas inflation in April 2023 stood at 22.27%, the counter-factual evidence suggests that it could have risen to 30.48% in April 2023 had the MPC not taken any action to raise the policy rate as it did since May last year.
Indeed, collectively, the MPC rate hike has moderated the rise in inflation by about 800 basis points over the last year,” he said.
Drivers of Inflation
Godwin Emefiele also spoke to the drivers of inflation which he blamed on a number of factors including food, fuel scarcity and imported inflation.
On food
“The recent uptick was driven largely by the increase in both the food and core components, which rose moderately to 24.61 and 20.14 per cent in April 2023 from 24.45 and 19.86 per cent, respectively, in March 2023. The lingering insecurity in major food-producing areas; high cost of transportation driven by rising energy costs; activities of middlemen in the food distribution channels; as well as the persistence of shocks from legacy infrastructural bottlenecks, remains major drivers of the inflationary pressure.”
On imported inflation
“The MPC observed that the economy continued to be weighed down by high import bills, leading to pressure on foreign exchange and resultant increase in the general price level. The Committee noted that the economy needs to build up the stock of foreign reserves to act as buffers against shocks. In addition, the current trend in price development would continue to be monitored by the Bank with greater collaboration with the fiscal authority, to address the drivers of inflation.”
On higher energy prices
“Headline inflation in the view of Members, remained high due largely to a host of non-monetary issues outside the reach of the central bank such as the perennial scarcity of Premium Motor Spirit (PMS) and expectations of shortterm hikes in the pump price of PMS; high and rising price of various energy sources”
Optics
Governor Godwin Emefiele’s remarks shed light on the ongoing efforts of the Central Bank of Nigeria to combat inflation and maintain macroeconomic stability.
- The apex bank believes that despite facing numerous challenges such as food insecurity, fuel scarcity, and imported inflation, the MPC’s hawkish inflation policy has shown positive results in moderating the rise in inflation.
- Whilst they may have the data to buttress this line of argument, the policies are failing to bring down inflation as evidenced by the latest inflation numbers.
- It appears the central bank might be giving itself a pass mark for the aggressive rate hikes as it pushes the narratives that inflation may have crossed 30% without their aggressive rate hikes
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