NIGERIA: Increased Political Spending, Others Threaten Price Stability

The threats from increased political spending and growth in money supply have been identified as some factors that are underlining threats to the consumer price index (CPI) in Nigeria.

Other factors that have continued to threaten inflationary pressure in the country include the liquidity overhang in the banking system, continued decline in global oil prices, external reserves depletion and a sustained pressure on the naira.

The Financial Derivatives Company Limited (FDC) stated this in its latest economic bulletin obtained on Monday.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN)  will meet next week.

Nonetheless, the FDC, which indicated that based on its trend analysis that projected an inflation figure of 7.8 per cent in December 2014, argued that its outlook for the headline inflation rate, reduces the concerns of a likely rate hike by the MPC.

“The CBN will not be swayed by any decline or otherwise in consumer prices. Nonetheless, the CBN likely to consider further depreciation of the naira if the oil price slump persists.

“The hawkish monetary policy stance of the MPC is therefore not expected to change at the January 2015 meeting.

“However, the monetary authority will be careful since further tightening may be detrimental as the general election is less than three weeks from the scheduled January MPC meeting,” it stated.

But it predicted that the banking sector regulator would continue to use administrative tools to support monetary policy.

It also anticipated that the money market would be relatively quiet and influenced by money market liquidity conditions which itself is a function of the inflation rate.

The outcome of the MPC meeting in January is also not expected to have any significant impact on interbank interest rates, it added.

Commenting on its projection for exchange rates, FDC argued that speculative activities as well as exogenous shocks, rather than the inflation numbers, would continue to determine the level of volatility in the forex market.

“More reserves funds and other administrative measure will be used to defend the naira and limits the increasing dollar demand pressure.

“However, the use of the external reserves by the CBN to defend the currency may be constrained as global oil prices continue to fall with adverse implications on government revenue and external reserves accretion.

“We estimate that the naira will trade within N180-185/$ at the interbank market against the dollar ahead of the election and may subsequently depreciate further,” it added.

According to the FDC, the projected lower inflation rate is not expected to have any significant impact on the stock market performance. The major drivers of the market, according to the report would remain speculative activities influenced mainly by macroeconomic uncertainties such as the oil price plunge and likely increase of US and euro zone interest rates. “Therefore, the stock market is expected to remain in the bear territory in the near term with some relief after the elections.”

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