The Central Bank of Nigeria (CBN) Deputy Governor, Financial System Stability Directorate, Philip Ikeazor, has said given the poor contribution to growth and vulnerability to rate hikes of the oil and manufacturing sectors of the economy, consecutive aggressive tightening of interest rate will further depress the economy.
He made the statement in his personal statements as a Monetary Policy Committee (MPC) member at the recent 151 MPC Meeting of March 25 – 26, 2024.
Recall that the committee raised the MPR by 200 basis points to 24.75 per cent from 22.75 per cent.
The considerations of the committee at the meeting focused on the current inflationary pressures and the need to anchor inflation expectations as well as ensure sustained exchange rate stability.
Ikeazor argued that, “The pressure point is already manifesting, as indicated in the projected contraction of PMI in the industrial sector by 7.1 index points occasioned by rising input cost and low-capacity utilization.
Another member of the MPC, a senior fellow and director of the Africa Growth Initiative in the Global Economy and Development Programme at Brookings, Aloysius Uche Ordu, in his statement, emphasised that hiking interest rates impact consumer spending and business investments, as reflected in the composite purchasing managers’ index in February 2024.
He argued that substantive progress in addressing the supply-chain issues and other cost-push factors is needed to minimize the risk that inflation might remain high for longer, adding that such an outcome will make life difficult for Nigerians and damage the functioning of the economy.
“To allow higher inflation to become entrenched in people’s expectations would make it much more expensive to reduce later through even higher interest rates, larger output losses and higher unemployment,” he said.
The concerns of Ikeazor were further highlighted by the Governor of the CBN and Chairman, Monetary Policy Committee, Olayemi Cardoso in his personal statement when he argued that, “If such a hyperinflationary scenario is to become reality, available options to control inflation could be severely constrained.”
Cardoso noted that the facts presented to the MPC clearly indicate that the monetary factors contributing to inflation are diminishing in significance.
Seller’s inflation, government palliative are new dimensions to inflation
Cardoso also revealed that new dimensions of inflationary pressure are emerging.
He said; “First, ‘seller inflation’ arising from the oligopolistic structure of commodity markets, as noticed in the prices of local commodities, is gaining significance.
“In addition, huge purchases by the government for distribution as palliatives to vulnerable citizenry is adding another dimension to the food price inflation, with seasonal factors of food price increases during religious fasting and festive periods, adding price cyclicality. Some of these new sources of inflation are better addressed by the fiscal authorities to complement the efforts of monetary policy in achieving round price stability.”
Ikeazor further elaborated on Cardoso’s ‘Seller’s inflation’ theory when he said: “Statistics and contextual analysis identified two related pass-throughs as key drivers of headline inflation: imported food and the psychology of seller’s inflation.
“The seller’s inflation pass-through reflects the use of the exchange rate at the time of purchase of the current stock of inventory as a guide to markup for domestic market prices despite a real-time appreciation in the exchange rate.”
This psychology, he explained further, extends to the price of commodities which are foreign exchange-neutral or not affected by the dynamics in the exchange rate.
Overall, the members maintained that as the various economic reforms implemented by the federal government continue to yield results, economic growth will be sustained in 2024 and boosted in 2025.
They noted that further harmony of fiscal and monetary policies is, thus, imperative to achieve a non-inflationary growth and stable macroeconomic environment.