Ought the Monetary Policy Committee to have tightened rates?, By Uddin Ifeanyi

Central Bank of Nigeria (CBN)

Why did the Central Bank of Nigeria’s (CBN) policy committee (the Monetary Policy Committee – MPC), at its meeting last week, hike its benchmark interest rate? After all, the inflation rate, as measured by the National Bureau of Statistics’ (NBS) consumer price index appeared to be on the mend. In July, the headline inflation rate rose by 33.40 per cent on an annual basis, having risen by 34.19 per cent in June. In August, the rate came in at 32.15 per cent, down on the July print. Indeed, the July headline inflation rate was the first time in 19 months that the rate had fallen. With inflation appearing to be trending down, ought the MPC to have, instead, held off from raising rates – even if a rate cut was not on the cards? A lot of commentators on the market seemed to favour the pause ahead of the MPC’s meeting.

According to the communique in which the MPC’s decision was communicated, the committee was exercised by worries about the direction and pace of the core measure of inflation. Reporting on movements in the consumer price index for August, the National Bureau of Statistics, estimates that core inflation rose by 27.58 per cent on an annual basis. In July, the core measure of inflation, which strips out the effects of supposedly volatile farm produces and energy prices, had risen by 27.47 per cent. Headline inflation trended down over the same period. Significantly for this conversation, headline inflation is more responsive to tightening monetary conditions than is the core gauge. However, even the moderating headline figures tell a far nuanced story. Desirable, though it would have been to point to softening headline figures as indicative of the efficacy of the CBN’s non-accommodative monetary policies, the truth is that better recent farm-gate conditions and the working out of the base effect are far likelier explanations.

As explanations go, the CBN’s argument that it hiked prices because “core inflation has remained elevated, driven primarily by rising energy prices”, fell considerably short. If the NBS defines “core inflation” as “All items less farm produces and energy”, it is hard to see how core inflation is succumbing to variables that are not included in its computation. A far better explanation is that while the NBS excludes both produce and energy prices from the computation of its “core inflation” measure, this latter index still includes transportation costs. So, yes, through secondary effects, energy prices have pushed the core measure up. Nonetheless, it would seem that “rents (actual and imputed rentals for housing class)…and accommodation service, laboratory service, X-ray photography, consultation fee of a medical doctor, etc. (under medical services class)” had as much effect (if not more so) on rising core inflation prices last month as did “bus journey intercity, journey by motorcycle, etc.  (under passenger transport by road class)”.

Should we be concerned with the central bank’s messaging? Yes – and very much so! Because far more than a central bank’s decision function, the financial market’s understanding of why these decisions are taken, and what they mean for the apex bank’s short-term policy trajectory play large roles in setting wholesale and retail prices for money, and by extension in the economy’s ability to efficiently allocate resources. It matters, then, that the CBN is fuzzy about the relationships in the main index that drives its monetary policies.

But it matters more that the domestic dynamics about where prices are heading over the next 12 months has been altered by three recent developments. Whether taken together or separately, the recent increase in the pump gate price for petrol, flooding in the nation’s breadbasket (including from the much-advertised release by the Cameroonian authorities of water from the Lagdo Dam), and the expected implementation by the separate tiers of government and their agencies of the new minimum wage would have a less than positive influence on domestic prices. Thus, while sections of the commentariat in the economy had thought that on its current tightening trajectory, the CBN would have managed to drive inflation towards 25 per cent by year-end 2025, we now expect monetary conditions to be much tighter for much longer.

The CBN may have muddled its reasons for hiking its benchmark interest rate at its meeting, last week, but given the projected trajectory for domestic prices, a further tightening of monetary conditions was in order.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.