Tuesday, April 19, 2016

Fuel, forex crises ‘major cause of inflation’

• Interest rate hike likely

Scarcity of foreign exchange (forex) and fuel is responsible for the spike in inflation figure for last monh, a report by FBN Quest, the research arm of FirstBank, has said.

Data from the National Bureau of Statistics (NBS) shows a pick-up in the headline rate to 12.8 per cent year-on-year last month from 11.4 per cent the previous month.

Analysing the NBS data, FBN Quest team warnedin the report tagged: More shocking inflation numbers that the inflation figure would worsen if the fuel and forex crises persist.

The team said prices of housing, water, electricity, gas and others increased by 15.9 per cent year-on-year.

It said as forex scarcity continues, importers would meet only a small part of their needs at the Central Bank of Nigeria (CBN) rate.

"Therefore, for the balance, they pay the parallel rate or they do not import. In either case, inflation ticks upwards. The bid at the CBN's sales of forex is easing, which reflects both a softening of household demand and greater realism about supply on the part of the banks/importers," they said.

They explained that the Monetary Policy Committee (MPC) hiked interest rate in March to ensure that  new policy rate of 12 per cent would remain positive.

"Logically, it should now hike again when it next meets. The forex shortages are set to continue in the months ahead, which points to more depressing inflation reports and, perhaps, more monetary tightening. However, the MPC may choose to modify its thinking on inflation and introduce a bias in favour of growth in its policy," they said.

FBN Quest explained that there were steep increases for both the core and food measures to 12.2 per cent year-on-year and 12.7 per cent year-on-year from 11 per cent and 11.3 per cent.

The research firm wondered how headline and food price inflation were similar last month, and above the core measure, which has a 51.3 per cent index weighting.

The explanation lies in the NBS health warning that processed foods are included in two measures.

The firm said fuel shortages were another reason for the poor inflation report even as prices of housing, water, electricity and gas  increased by 15.9 per cent year-on-year.

Other analystsattributed the high inflation figures to economic slowdown fuelled by the collapse in crude prices, which has slashed government revenues, weakened the currency and caused slow growth.

The economy grew by 2.8 per cent last year, its slowest pace in decades.

Food prices, which account for the bulk of the inflation basket, rose by 1.4 per cent points to 12.7 per cent last month, the Bureau said, adding: "The higher price level was reflected in faster increases across all divisions.''

The NBS expects inflation to end the year at 10.16 per cent, above the Central Bank's target upper limit of nine per cent. The price index ended at 9.55 per cent last year.

March rate is 3.8 per cent above the CBN ceiling of nine per cent and it confounds the MPC by posing a major policy dilemma of a weak exchange rate, high inflation and high interest rates.

A breakdown of the inflation report shows that the food basket increased by 1.4 per cent to 12.7 per cent while the core inflation, which is price level de-seasonalised for volatile agricultural produce, increased by 1.1 per cent to 12.2 per cent last month.

The food basket was a victim of higher transportation and logistics costs. The highest price increases were in fish, vegetables, bread and cereals. The core index jumped significantly due to imported inflation, higher electricity tariffs and fuel shortages.

Besides the restaurants and hotels divisions, all major divisions contributing to the index accelerated faster than anticipated. The highest price increases in the core index were recorded in the electricity, furniture, road transport, spare parts and liquid fuels groups.

The urban index increased to 13.5 per cent in March, up from 12.3 per cent in February. The rural index increased to 12 per cent in March, up from 10.7 per cent in the previous month.

Urban prices are rising faster than rural prices due to food transportation costs as well as higher import content in urban areas.


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