Inflation rate rises to 12.6% in June 2020
- Headline inflation rate rose to 12.56% in June 2020, a 15 basis points increase from 12.4% in May 2020.
- Inflation rate in June is the highest since March 2018.
- Increase in food prices remains a major driver of inflation in Nigeria.
- Factors such as exchange rate depreciation, supply chain disruption and rising transport costs are responsible for the upward trend in inflation rate.
- Real interest rate continues to expand as inflation trended upwards in June.
- The gap between 1 year Treasury Bill rate and inflation rate expanded to -8.7 percentage point (pp) in June 2020, from -8.6 pp in May 2020.
- For the first time since February 2018, inflation rate exceeded the MPR by 0.1pp in June 2020, resulting in a negative real interest rate.
- With inflation expected to rise further in coming months, we expect a further widening of the gap between inflation and the real interest rate, particularly in relation to the MPR.
MPC holds MPR at 12.5% amidst rising inflation and currency pressure
On July 20, the CBN Monetary Policy Committee (MPC) held its fourth meeting of 2020. At the meeting, the Committee took the following decision:
- Retain the Monetary Policy Rate (MPR) at 12.5%;
- Retain the asymmetric corridor of +200/-500 basis points around the MPR;
- Retain the CRR at 27.5%; and
- Retain the Liquidity Ratio at 30%.
This decision was based on the following considerations:
- Need to observe the effects of the cut in MPR at the previous meeting.
- Need to evaluate the effectiveness of fiscal and monetary response to revive the economy amidst the COVID-19 pandemic.
- Need to strike a balance between output growth and price stability.
- The gradual improvement in economic activities following the lockdown in April.
- Heightened inflationary pressure arising from both monetary and structural factors.
Assessment of MPC Decision
- While the decision to hold is expected given rising inflation, we also observe the weakened efficacy of the benchmark rate (MPR), especially given the huge disparity among interest rates- MPR, lending rates, T-bills rate, OMO, Bond yields among others.
- Addressing this disparity remains crucial in ensuring, confidence, stability and attracting investments into different segments of the markets.
- More recently, the Cash Reserve Ratio (CRR) appears to be a more useful tool for liquidity management. However, pursuing a high CRR coupled with the loan-to-deposit (LDR) policy, which compels banks to lend to businesses will tighten banking liquidity and could have implications on non-performing loans and overall growth.
- We believe that this, coupled with rising inflation and pressure on external reserves will be major concerns for the MPC in coming months.