Modupe Gbadeyanka
By Modupe Gbadeyanka
The research arm of Lagos-based financial institution, FSDH Merchant Bank, has said it expects inflation rate for the month of February 2019 to moderate to 11.31 percent from 11.37 percent recorded a month earlier.
In its Inflation Watch report, FSDH Research said the drop in inflation will defy electioneering spending, which was earlier predicted to contribute to a rise in the head inflation.
The National Bureau of Statistics (NBS) will release the inflation figure for the month of February on Friday, March 15, 2019, well ahead of the second Monetary Policy Committee (MPC) meeting of this year scheduled for March 25-26, 2019.
On February 23, 2019, Nigeria held the presidential and National Assembly elections, while on March 9, 2019, the governorship and state houses of assembly polls took place.
“If the inflation rate drops, can we expect a further drop in interest rates (yields) on fixed income securities? Or, can we expect members of the MPC of the Central Bank of Nigeria (CBN) to clap their hands for achieving stability in domestic prices and reduce policy rates?” the firm asked, saying it believes inflation rate in double digits, “as we predict it in 2019 and through 2022, may not justify a reduction in the monetary policy rates.”
“We believe there are many other issues that Nigerian economic managers need to address before the Nigerian economy can enjoy a low, as many people suggest, single digit interest rate,” the report said.
It further noted that, “When there is a general increase in the prices of goods and services, there is the tendency for suppliers (producers) to be happy as it should increase their profit.
“However, an increase in the general prices of goods is not good for consumers as it reduces their buying powers: the same amount of money cannot buy the same quantity of goods as it previously could.
“On the other hand, when there is a persistent decrease in the prices of goods and services, the profit of the suppliers (producers) will drop while the consumers’ ability to buy goods increases as a certain amount of money is enough to purchase more units of goods.
“Therefore, a balance in general prices of goods is needed to encourage both producers and consumers. This is why the CBN regularly modifies interest rate and yields to achieve a target range of inflation rate, currently put at 6 percent to 9 percent.”
FSDH Research the price monitor it conducted on certain food and non-food items in February showed that most prices increased at a slower rate in February than in January.
It said the slower pace of increase was an indication of an expected drop in the inflation rate in February.
“Our analysis shows the movements in the international food prices did not exert upward pressure on local prices in February.
“The report published by the Food and Agriculture Organization (FAO) of the United Nations for the month of February 2019 shows that food prices such as sugar, milk, butter, cheese, meat, oils, rice, wheat and maize increased on the international market.
“However, the value of the Naira strengthened against the Dollar during the month. The appreciation recorded in the Naira eliminated the impact of the increase in the international food prices on local prices.
“Although the inflation rate is trending downwards, FSDH Research stresses that certain economic realities may not guarantee a continued downward trend. The key limiting factors to a continued drop in the inflation rate are the need for adjustments to the current pricing regime of Petroleum Motor Spirit (PMS) and the electricity tariff.
“If these adjustments are carried out, government will save a certain amount of money that could and should be redirected to fund other critical sectors of the economy such as healthcare, education, security and infrastructure development.
“If this was the case, we would expect these adjustments to attract investments into those sectors. Although such adjustments may shift the inflation curve from its current level, the good news is that it may not go higher than 13 percent level.
“It is important to note that, if the Federal Government of Nigeria (FGN) implements these pricing adjustments, FSDH Research expects the average inflation rate of 2019 to be around the same average inflation rate of 2018. Meanwhile, the inflation rate would be substantially lower than it was in 2016 and 2017.
“Therefore, it may be better for Nigeria to remove ‘subsidies’ in both the energy and power sectors. We believe it would be a case of temporary pains and permanent gains.”
