By Babajide Komolafe

Consolidated Discount House has said that the Central Bank of Nigeria (CBN) will maintain its benchmark interest rate despite reduction in the inflation rate to 9.0 per cent in May.

The CBN has maintained the Monetary Policy Rate (MPR), its benchmark interest rate at 12 per cent since 2011 in an effort to tighten money supply and arrest inflationary pressures in the economy.

Reflecting on the impact of the policy, it said that inflation fell consistently from a peak of 12.9 per cent in June 2012 to 9.0 per cent in January. This led to increased calls for a reversal of the tight monetary policy and downward review of the MPR.

But in a report titled, Inflation in May 2013 and Market Review, Consolidated Discount House said that despite intense calls and expectations of downward review of the MPR, the threat of higher government spending and outflow of foreign portfolio investments (FPI) may compel the CBN to maintain the MPR at 12 per cent during its next monetary policy committee (MPC) meeting.

The report said, “With the recent market rumblings triggered by the exit of some FPls and its consequent pressure on the local currency and output leakages in oil production leading to dwindling revenues for the government, we do not envisage a rate cut at the next meeting. It may still be too early to call if the CBN may be forced to raise policy rates at the July meeting as the Governor has suggested, but this will largely depend on events in the market between now and the next MPC session.”

“According to the Central Bank, the inflation outlook remains relatively benign with projections that headline inflation will remain in the single digit range for the next six months. However there are risks to this outlook. The Monetary Policy Committee has identified the principal risks to the incaution outlook remain fiscal spending and possible pressures on the exchange rate from any attrition to reserves caused by declining revenues as a result of output leakages. A higher than expected outf1ow of foreign portfolio investments as envisaged in recent times will threaten the value of the Naira. In an import dependent economy like Nigeria’s, that could lead to higher inflation numbers.

“The hot money within the Nigerian financial system from Foreign Portfolio Investors (FPI) estimated to be about a quarter of the foreign reserves ($48.48 billion, June 13th) poses significant risks to the CBN inflation outlook.

The CBN Governor has said the bank may raise its policy rate or Cash Reserve Ratio to curtail excess liquidity that may be induced by pre-2l05 election spending and the military campaign in north east Nigeria. At the same time, we maintain our stance that the doves in the MPC do not have the numbers to change the policy rates for now.”