Emergency MPC likely over market crisis
The Central Bank of Nigeria (CBN) may summon an emergency Monetary Policy Committee (MPC) meeting to review its stand on key market decisions taken at the January 21 meeting, it was learnt yesterday.
Financial Derivatives Company (FDC) Managing Director, Bismarck Rewane broke the news in the company’s economic report for February released at the weekend.
He said the MPC will meet March 17 to 18 or even earlier, if an emergency meeting is called, to review its current monetary policy stance.
All indicators are that the markets are in for a bumpy ride in February and March, Rewane said.
Rewane’s reason is that the National Bureau of Statistics (NBS) released its January inflation data on February 12 which showed that the year-on-year (y-o-y) consumer price index was eight per cent, unchanged from December 2013.
The consensus view of most economists is that the rate of inflation will remain flat, but with a probability of a marginal increase.
Besides, inflation in Nigeria has been muted over the past year mainly because of tightness in money supply aggregates, a stable naira and an increasing interest rate environment.
Rewane said the low inflation rate of eight per cent did not take the market by surprise because of the usual time lag between money supply increase and exchange rate pressure on consumer prices. In other words, the transmission time lag of four to six weeks had not yet manifested.
Also, last year, money supply growth was negative at –4.82 per cent compared to the annual target of 15 per cent. Therefore, an increase in money supply aggregates in January would have no impact on total money supply, since it is starting from a negative base.
There has been increased currency pressure since the removal of the limit on dollar sales to bureau de change last year. The impact was a sharp depreciation in the naira from N162 to 176 to a dollar at the parallel market.
In the informal market where retail trade inventory is mainly financed by dollars sourced in the parallel market, the prices of goods is directly linked to the value of the naira in the parallel market. In December, some traders had slowly started re-pricing their inventory based on a weaker naira. The effect of this re-pricing was not apparent because of the seasonal Christmas price increases.
He said what is more important now is the trend of inflationary expectations. “A number of manufacturers surveyed were anxious as to the direction of the naira in the forex market. Most of them agreed that they would pass through increased costs in the pricing of their products to the market. Nonetheless, the sentiment of inflationary expectations points to a more pronounced increase in prices in February,” he said.
This, he said, was driven by the 50 per cent increase in the cost of gas, which will push up the cost of power for gas-fired generators and the Gencos.
Furthermore, a depreciating naira and depleting external reserves will have a negative impact on the non-food basket. “While inflation remains muted in January and February, the real threats will come in March. This is because the impact of the new automotive policy tariffs and the 50 per cent hike in gas prices will be more pronounced in the markets. In addition, the money supply effect will start biting in March,” he said.
The analyst said a spike in the rate of inflation in March will undermine monetary policy objectives and threaten macro-economic stability. The CBN Governor has already expressed concerns on the depleting external reserves and has reiterated his determination to defend the naira. However, if the depletion in external reserves continues, an adjustment in exchange rate becomes inevitable.
The question on everyone’s lips is when and by how much the currency will depreciate especially at a time when the parallel market rate has appreciated from N176/$ to N170 to dollar and the interbank exchange rate has moved in the opposite direction to N167 to dollar.
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