By Stanley Opara

Analysts at Financial Derivatives Company Limited have said the increase in the Monetary Policy Rate by the Central Bank of Nigeria may not be adequate to control the prevailing inflationary pressure in the country.

The MPR is the anchor rate at which the CBN lends to Deposit Money Banks.

The analysts, in the FDC monthly Economic Outlook made available to our correspondent on Wednesday, however, said the CBN Monetary Policy Committee needed to increase rates further in the coming months should prices continue to rise, especially as election preparation and government spending intensify in the coming weeks.

The MPR as the apex bank’s main financial instrument, determines the lower and upper band of the CBN standing facility and is expected to have the capability of acting as the nominal anchor for other rates.

The FDC analysts, however, said that on the response side, not much had been done by policymakers to rein in rising prices, adding that loose fiscal policies and a widespread reluctance to tighten monetary policy, still had prices creeping upwards.

The CBN has raised the benchmark rate twice in the last five months, with the latest hike of 6.5 per cent targeted at anticipated inflation.

Inflationary pressure in the country, they agreed, was expected to remain elevated during the year at between 12.5 per cent and 14 per cent. Some of the obvious inflationary threats expected to crystallise in the coming months, they noted, included political spending ahead of the April election; and the implementation of the 64 per cent increase in minimum wage to N18,000 (equivalent to 2.4 per cent of Gross Domestic Product or N567bn).

Other threats, they added were “removal of petroleum product subsidy estimated at about N600bn annually and rising government spending and borrowing.”

“To curb inflation, the CBN may need to further increase the MPR and allow currency appreciation, or implement either of the two options,” they added.

In a typical less developed country like Nigeria with a shallow money market, the FDC analysts said the direction of causality between interest rate and economic growth was unclear.

According to them, over the past two years, changes in interest rate had helped in managing macroeconomic volatility.

“The same cannot be said about the country’s real output growth which has experienced significant improvement in performance even when interest rates remain high. This concern is being heightened by 2010 economic data which indicated a robust 7.8 per cent real GDP growth at a time of constrained credit market and stubbornly high interest rate,” they explained.

Going by the high inflation expectation in 2011, they said it was likely that there would be further increase in interest rates in order to push inflation back, adding that high interest rates would take liquidity out of the system and also affect the business environment.

Source: Punch