Published On: Tue, Jul 26th, 2016

Bank querries CBN stance on inflation

Central Bank of Nigeria, CBN

Central Bank of Nigeria, CBNCBN

LAGOS, (CAJ News) – A FINANCIAL think-tank has questioned the Central Bank of Nigeria’s (CBN’s) response to rising inflation.

Nigeria’s inflation rate has hit 16,5 percent, highest point since 2005.

“The CBN’s response to inflation in 2016 has been questionable,” argued Rands Merchant bank in its Wednesdai international markets report.

It bemoaned the CBN Monetary Policy Committee (MPC) failed to capitalise on the momentum it had built in March by keeping interest rates on hold in May, despite inflation printing at five-year highs and relative to the consensus view that assigned a very high probability to a hike.

“Having embraced the concept of FX flexibility, the committee will have to contend with the upward pressure on prices as the economy adjusts to a substantially weaker exchange rate,” RMB stated.

The financial house projected that sustained price volatility would force the CBN to enact stricter monetary policy measures in the second half of  the year to restore some measure of uniformity between its exchange rate and monetary policies.

“Despite recessionary risks, we believe the MPC will raise the MPR by 500bp over the next 12 months, with at least 200bp of hikes today, to dampen the FX pass-through to inflation.”

RMB said aggressive tightening, which would also entail an increase in the cash reserve ratio, is a short-run policy response to bridle inflation expectations.

Despite the considerable downside risk this outcome poses to demand growth, the structural nature of Nigeria’s economic slowdown means that monetary policy would be ineffective in propping up GDP growth.

CAJ News

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