Inflation : MPC Members See Supply Side Disruptions as Culprit

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CBN InfraCorp

With the Central Bank of Nigeria (CBN), set to hold its 279th meeting of the Monetary Policy Committee (MPC) starting Monday May 24 and ending on May 25th, how do members of the MPC see the inflation outlook unfolding?

The MPC last met on the 22nd and 23rd of March 2021 and were confronted with downside risks to the optimism for significant improvement in global output recovery in 2021.

The Committee reviewed the developments in the global and domestic economic and financial environments in 2020 and the outlook for 2021 as well as the risks to this outlook.

Nine (9) members of the Committee were in attendance.

MoneyCentral took a look at their various relevant statements on year-on-year headline inflation which while still elevated, moderated to 18.12 percent in April 2021. Statements made by the MPC members that are relevant to inflation are reproduced below:

Adamu, Edward Lametek

I noted also the challenges posed by sustained inflation buildup. Headline inflation (year-on-year) rose to 17.33 per cent in February 2021 from 16.47 per cent in January 2021, reflecting largely the impact of sustained acceleration in food prices, driven mainly by supply-side factors – high transportation costs, security challenges and the lingering impact of the pandemic-induced lockdown.

Generally, dealing concurrently with rising inflation and slack economic activity can be challenging for monetary policy because policy instruments work more often on the basis of trade-off between output and inflation.

Yet, the available data up to mid-March 2021 do not really suggest a feasible trade-off between inflation and economic growth in the short-term.

The current episode of high inflation has its most important roots in supply constraints and exchange rate pass-through to domestic prices.

In the circumstance, tightening the stance of monetary policy may not rein-in the pressure on consumer prices; it could instead stall the fragile output recovery. Therefore, policy responses at this time must aim in part at increasing output and freeing supply chains.

Adenikinju, Adeola Festus

The rising inflationary pressure seems to be unabated. Bank Staff projection shows that inflation will remain above 17.9% by 2021M04. This is also fueling inflation expectation by economic agents. Nigeria has one of the highest inflation rates in the world. High inflation induces macroeconomic instability. It will negatively affect the welfare of households and fixed income earners.

The persistent high inflation figure, which is largely driven by structural factors, including insecurity all over the country, also has elements of monetary phenomenon, as Staff estimates show that broad money (M3) and net domestic credits were above their provisional levels in December 2020.

The liquidity in the economy is contributing to the pressures in the foreign exchange market as rational economic agents flee to safer currency amid low returns on fixed income assets and rising inflation rate. The planned huge budget deficit for 2021 Fiscal Year, will further fuel local inflation rate.

Added to these, the rising global commodity prices, plus the depreciating exchange rates and relatively high costs of shipping and clearing of goods at the Nigerian ports have all contributed to high imported inflation and reduce the extent to which imports could have mitigated the impacts of high domestic food prices in the short term.

I believe the persistent high inflation rate is concerning enough for CBN to start shifting its focus to address it. A signaling to economic agents that price stability remains the focus of the CBN will also curb some of the excesses in the foreign exchange market and reduce the liquidity induced inflationary pressures on the economy and protect fixed income earners.

Ahmad, Aishah N.

Persistent high inflation remains a key concern for monetary policy that will require active policy response.

Structural bottlenecks such as security challenges, which prevented farmers in major food producing regions from accessing their farms, and infrastructural gaps that hampered movement of 17 Classified as Confidential food crops from farm to market, exacerbated inflationary pressures thus reversing the decelerating trend of inflation observed in previous months.

There is an urgent need to address the structural rigidities fueling inflationary pressures to ramp up productive capacity in the agricultural sector and reduce supply side impact on food prices. In this regard, efforts at tackling security challenges faced in various geo-political regions must be intensified, so also is the execution of fiscal initiatives to improve transportation and logistics infrastructure.

Aliyu, Ahmed

The current inflationary pressure is driven by the rise in food prices, largely attributed to a combination of non-monetary factors which have led to disruptions to the supply chain, particularly insecurity in food producing regions and infrastructural gaps.

I do not subscribe to a tightening regime at this time, as there is a need to sustain ongoing interventions in critical sectors of the economy to improve the current output growth.

My opinion is without prejudice to the fact that a key mandate of the Bank is: ensure price and monetary stability.

Indeed, with eighteen months of rising price level, price stability does matter. But, since the current price hikes are not demand driven as such, tightening may be counterproductive as it could stifle credit growth, rollback the current output level, create more unemployment and exacerbate inflationary pressure.

Since the factors currently affecting inflation in Nigeria are largely outside the control of the central bank, a practical option in my view will be to concentrate on output growth, while focusing on the structural impediments to distribution and storage, which in the near to medium term would have a calming effect on the domestic price level.

Asogwa, Robert Chikwendu

The inflation risk at this point is still more related to supply side volatilities rather than demand pressures and addressing the supply disruptions are more likely to result in deflationary pressures. An appreciating nominal exchange rate in recent months and generally low pass-through is also expected to contribute to moderating future inflationary pressures.

Obadan, Mike Idiahi

The factors to worry about mostly are the disruptions in agricultural supply chains occasioned by bandits and herdsmen in the food producing areas of the country, policy induced factors of exchange rate depreciation, deregulation of petroleum product prices and the associated price hikes, increases in electricity tariffs, and infrastructural bottlenecks, especially road transport, and general atmosphere of insecurity in the country.

Policy will need to focus more on these factors with a limited role for monetary expansion. Some of them have tended to undermine the effectiveness of the CBN’s development finance interventions aimed at supporting growth, boosting aggregate supply and reducing the inflation rate.

Sanusi, Aliyu Rafindadi

Although the inflation rate has reached an unacceptably high level, given that the key drivers of the inflationary episode lie more on the supply side, the output cost of a tightening would be large, thereby risking a reversal of the v-shaped recovery achieved.

Shonubi, Folashodun A.

Rising food prices, as the major driver of inflation, has been attributed largely, to insecurity induced disruptions to food farming and distribution, as well as, other rigidities affecting availability and cost of essentials. In addition, monetary drivers of inflation may be attributed to rising credit and money supply, high liquidity etc.

it is therefore pertinent that as the fiscal authority takes pragmatic steps to resolve the structural bottlenecks, the Bank must, in addition to supporting growth, act to preserve price stability, especially since inflation is seen more as a monetary phenomenon. Clearly, not doing anything will portray the Bank as abandoning its mandate of price stability.

Emefiele Godwin, I

On a balance of judgement and evidence, recent decisions to spur growth were cognisant of the inflation trade-off.

In addition to the effect of the deliberately accommodative macroeconomic policies aimed at reversing the adverse effects of the Covid-19 shocks on real output, the pace of inflation was aggravated by supply factors including energy price hikes, climate (and other disruptions) induced food shortages, transport and distribution logistics drawbacks, exchange market pressure, etc.

The tailwind to food inflation is considerably the critical security situations in many food-producing areas of the country. In-house analysis, however, indicates that inflationary pressures may begin to ease by mid-2021 with the harvest season.

Recognising the importance of adequate food production, storage, distribution and supply to both GDP and inflation outcomes, the Bank will invigorate its development finance initiatives aimed at boosting the agricultural value-chain.

Bottomline

Most MPC members see inflation as a supply side issue for now, due to insecurity induced disruptions to food farming and distribution.

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