By BABAJIDE KOMOLAFE

The Central Bank of Nigeria (CBN) has limited options to forestall further increase in the inflation rate, said Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company.

Inflation rate measures rate of increase in prices of goods and services, known as inflation rate. In March, rose to 12.1 per cent from 11.9 per cent in February. Rewane however predicted that the rate will rise further to 13 per cent this month.

“Inflationary threats still persist in the medium term Impending electricity tariff hike, and impact of fiscal 2012 disbursement. On the downside, we expect inflation may rise to 13% in April/ May”, he said in a presentation on Monthly Economic News and Views at Lagos Business School Executive Breakfast Meeting held last week.

Last year, in order to curb inflation the CBN tightened money supply by raising its benchmark interest rate, the Monetary Policy Rate (MPR) six times from 6.25 per cent to 12 per cent in November. It also raised the banks’ Cash Reserve Requirement (CRR) three times from 1.0 per cent to 8.0 per cent; and their liquidity ratio (LR) once from 25.0 per cent to 30.0 per cent.

This resulted to steady increase in interest rate in the money markets from the region of six per cent to 15 per cent.
Rewane however said that with money supply at very low levels and interest rate already high, any attempt to further tighten money supply would hurt businesses.

He said, ‘Consumer prices increased by 0.20 per cent in March to 12.1 per cent.  The food basket witnessed an increase of 2.1 per cent to 11.8 per cent. The planting season effect and a delayed impact of fuel prices have kicked in but exchange rate stability and relative appreciation of the naira to the dollar helped keep imported inflation muted. Money supply growth deceleration also contributed towards inflation containment in March.

“Money supply growth is now annualized at  -0.06 per cent and  this is still far below the five years average growth in broad money of 30 per cent.  Meanwhile the inflation gap i.e. difference between M2 growth and real GDP growth is at its narrowest in 5 years.

“The challenge is how to manage the impending impact of the AMCON bonds maturity date of December 2013 CBN has very limited options. It cannot push rates up without hurting business.