What Next for CBN MPC as Multi-Year High Inflation Ebbs to 21.34% in December 2022?

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The Monetary Policy Committee (MPC) of the CBN will meet on Monday and Tuesday for its first assembly in 2023 to assess the existing guiding economic principles and indices aimed at growth, but a major point on the agenda for the committee is inflation, which in December 2022, decelerated to 21.34% year on year from 21.47% in November 2022, according to data from the National Bureau of Statistics.

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The CBN MPC was on a hawkish tone in 2022, as containing inflation took precedence over stimulating growth, and as such, the policy committee decided to raise interest rates at the best opportunity after considering several factors that had influenced their decisions.

Regardless of the fact that central banks across the globe have embraced a tighter monetary policy and higher interest rates, the Nigerian central bank appears to have no breathing space as it is faced with the challenge of striking a balance between supporting economic growth and curbing rising inflation.

Following a ten-month upward trend in
headline inflation, Nigeria’s headline
inflation unexpectedly eased by 0.13%
month on month to 21.34% in December 2022, indicating 5.72% points higher year on year from 15.63% and bringing the annual inflation rate
to 18.77%, compared to the overall
average of 16.98% in 2021.

The disinflation trend reported in December
was driven by favourable base effects,
a sharp increase in demand usually
experienced during the festive season, and an increase in the cost of production, e.g., an increase in energy costs, transportation costs, and exchange rate depreciation, etc.

Away from expectations for a rapid acceleration in the headline index, this indicates that the

All Item Consumer Prices Index rose at a faster pace in December (1.71%), owing to the festivities, where prices rose without looking back, as well as the currency market’s ongoing FX pressure on the naira and the country’s insecurity situation.

The increases were recorded especially in the food and non-alcoholic beverages, transportation, and miscellaneous goods and services spaces.

Our analysis of the report showed that the other two measures of inflation, food and core inflation, also picked up year on year.

Thus, the food inflation rate is printed at 23.75% year on year, rising 6.38% from 17.37% in December 2021.

The rise in food inflation was caused by increases in the prices of bread and cereals, oil and fat, potatoes, yams, and other tubers, fish, and other food products.

On a month-on-month analysis, food inflation was 0.49% higher than the November rate of 1.40% and was driven by increases in the prices of some food items like oil and fat, fish, potatoes and tubers, bread and cereals, and fruits, etc.

On the other hand, the core inflation rate, which excludes the prices of volatile agricultural produce, stood at 18.49% in December 2022 on a year-on-year basis, up by 4.62% when compared to the 13.87% recorded in December 2021.

On a month-on-month basis, the core inflation rate was 1.33% in December 2022. It stood at 1.67% in November 2022, down by 0.34%.

Thus, the highest increases were recorded in: gas, liquid fuel, passenger transport by air, vehicle spare parts, fuels and lubricants for personal transport equipment, solid fuel prices, etc.

Cowry Research notes that the slight deceleration comes in line with the trend globally as inflation has hit multi- year highs in many advanced and developing countries; but more concerning is the fact that month on month reading continues to rise, as pockets of consumers are being squeezed.

As the MPC meets to decide on various economic variable, the policy committee may be tempted to pedal softly on its tightening stance by a token hike of 25 basis points or keep parameters constant.

We believe that a moderate reversal in the headline numbers will skew the voting pattern of the committee members in favour of maintaining a slight tightening or hold stance. Regardless, the lag-effect from the policy tightening may take longer in reality as Nigeria has a weak policy transmission system.

Given the decisions of the committee to hike policy rates at its different assemblies in 2022 on the back of related economic disruptions and uncertainties that are beclouding the monetary space in Nigeria, the MPC is likely to turn its gaze back to price stability in 2023 as multiple objectives on the CBN’s table will test monetary policy effectiveness.

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