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High inflation worries monetary policy makers

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By Mercy Kelani

Inflation rate rose from 21.34 percent in Dec to 21.82 percent in Jan.

Last week, personal statements of members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the last meeting in January 2023, revealing the increasing concerns of policy makers on the growing inflation in the country. Regardless, they asserted that the Nigerian financial system is stable. These statements have shown that the major concern of members of the Monetary Policy making body is the continuous increase of prices of goods in the country.

Although inflation moderated in December last year, it rose in January this year following the MPC’s raise of the benchmark interest rates. According to data from the National Bureau of Statistics (NBS), inflation rate rose from 21.34 percent in December last year to 21.82 percent in January this year. In a bid to reduce the increasing rate of inflation, the MPC raised the benchmark interest rate to 17.5 percent from 16.5 percent at its last meeting in January.

Inflation is a threat to macroeconomic stability.

A member of the MPC, Adenikinju Festus, in his statement, said that the December 2022 fall in inflation revealed the confidence which Nigerians have in the actions of the monetary body to curb inflation. Deputy Governor of CBN, Corporate Services, Adamu Lamtek, however noted that in spite of the moderation, inflation is still a major challenge to macroeconomic stability in the short to medium term. The deputy governor for financial stability, Aisha Ahmad, likewise stated that high inflation, despite a cumulative 500bps policy rate hike over 2022, remains a major threat.

Ahmad added that alongside the tight monetary policy stance since May 2022, market interest rates has been rising while the rate of development finance interventions of the bank has been slow in curbing monetary induced inflation. Year-on-year, headline inflation keeps being sticky with a marginal fall to 21.34 percent in December last year from 21.47 percent in November. However, there is provision of significant support by the financial system for required domestic economic resilience to tackle global shocks.

The banking system remains resilient and sound.

According to data from the CBN, stability in broad soundness indicators and an unfamiliar increase in asset quality has continued to grow like credit to the private sector. In December 2022, capital adequacy was at 13.83 percent which was 383 basic points above beyond the 10 percent regulatory minimum. At the same period, industry liquidity was also solid at 44.10 percent with support from significant cash reserve requirement buffers available for provision of liquidity backstops if required by banks.

The deputy governor for Economic Policy at the CBN, Dr. Kingsley Obiora, asserted that the banking system still maintains resilience, safety and soundness. There was a decrease in Industry Non-Performing Loans from 4.9 percent in December 2021 to 4.2 percent in December 2022 which was lower than the maximum prudential requirement of 5.0 percent. This decline has been attributed to write offs, Global Standing Instruction (GSI), restructuring of facilities and sound credit risk management by banks.

Domestic prices trend should be reversed to sustain tightening stance.

Additionally, Ahmad stated that even with the sustained rate hike by the monetary authority in May 2022 there has been no sufficient alteration of liquidity levels in the economy. In 2022, annualized growth rates aggregates rose above annual targets, while real interest rates were still negative due to the increasingly high inflation. For a sustained tightening stance, it is necessary to ensure a reversal in the trend of domestic prices as a result of its adverse implications for real incomes, overall economic activities and threat to output growth.

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