Inflation Spike: Next MPC Meeting Will Be Trade Off Between Growth And Inflation – Analyst

When the Monetary Policy Committee (MPC) meets next week, they will be confronted with choosing between voting for economic growth and stifling growing inflation rate, economic analyst has predicted.
The thinking among most analysts is that, it will be a visitation of hardship on hapless Nigerians if the committee takes measures to fight inflation growth.
They believe that, although Nigeria has risen to become number eight, in terms of African countries with high inflation, the only way to go in this time of economic contraction is to push for growth as panacea to pulling out of recession.
Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company (FDC) Limited, “when policy makers are faced with the dilemma of either inflation or growth, the conventional logic is to choose growth in a period of contraction”.
He however said that with the spike in June’s inflation number the jury is out as to the outcome of the meeting.
“The most probable scenario is to maintain the status quo. Policy makers may not be inclined to tighten further as this could stifle growth and increase unemployment. They are likely to be comforted by the amount of liquidity mopping up due to the exchange rate change. Thus, are unlikely to apply a contractionary interest rate policy in addition to the exchange rate effect”, he said.
The impact of persistent inflation is erosion in value and confidence of economic agents. The market is expected to react accordingly to the trend of rising inflation.
Bond rates have settled in the region of 14.99 per cent recently. Given that bond yields are interest rate sensitive, it is believed that the outcome of the MPC is likely to impact the fixed income market.
For the money market, liquidity is low and the Nigerian Inter-Bank Offer Rate (NIBOR) rates are increasing, with Open Buy Back (OBB) and Over Night (O/N) rates at 20.83 per cent and 22.75 per cent, respectively. It is expected that activity in the money market to be driven by liquidity position.
The Nigerian stock market is volatile and is in search of direction. Any changes in the interest rate environment will increase the rate of volatility. The Scottfree 30-day volatility index as at 15 July, 2016 was 31.27 per cent on a scale of 0-100 per cent, with 100 per cent denoting highest volatility. However, stock market returns will be more a function of corporate earnings than interest rate sensitivity.
Rewane said, from June 2015 to January 2016, the rate of inflation has increased by an average of 0.1 per cent. The inflation rate of 9.6 per cent can be described as a natural rate of inflation consistent with slow growth and productivity constraints. However, as from February supply shocks, scarcity and speculation triggered sharp rises in inflation from 9.6 per cent to 16.5 per cent.

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