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Businesses, consumers divided over inflation, interest rate in 2018

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Anticipate naira appreciation, improved economy

CBN resumes liquidity mop up with N656bn TBs

By Babajide Komolafe

BUSINESSES and consumers are divided in their outlook for inflation and interest rates in 2018. While consumers expect inflation and interest rates to rise in 2018, businesses, however, expect both rates to fall.

Meanwhile, both categories of economic agents expect further naira appreciation and improvement in the nation’s macroeconomic conditions in 2018.

These were highlights of the Business Expectation and Consumer Expectation surveys for fourth quarter 2017 (Q4 2017) conducted by the Central Bank of Nigeria.

Monetary dynamics in 2017

From a peak of 18.72 percent in January, inflation dropped steadily by 2.82 percent to 15.9 percent in November.

Though interest rates were stable in 2017, they were excessively high, with lending rates of most banks hovering between 25 and 30 percent.

On its part, the naira appreciated from historic high of N520 per dollar in February, to N365 per dollar last week in the parallel market, buoyed by the sustained intervention of the CBN in the foreign exchange market, and the introduction of the Investors and Exporters (I&E) window, which have attracted over $10 billion into the economy.

Expectations for 2018

In their outlook for the economy in 2018, consumers said they expect reversal in inflation trend and rise in interest rate, but expect naira to appreciate further during the year. They however express increased confidence of improvement in macro economic conditions.

According the CBN’s Consumer Expectation Survey, “Most respondents expect the prices of goods and services to rise in the next 12 months. The major drivers are: Education, electricity, transportation, house rent, medical care, telecommunication, food and other household needs. Consumers expect borrowing rate to rise and Naira to appreciate in the next 12 months.

“The consumers’ overall confidence outlook improved in Q4 2017, as more consumers were optimistic in their outlook. The index at 1.0 points was 30.8 points higher than the index in the corresponding period of 2016. Some respondents attributed this moderation in outlook improvement in the family income.

“The consumer outlook for the next quarter and next 12 months were also positive at 28.1 and 34.4 points, respectively. This outlook could be attributed to the anticipated improvement in Nigeria’s economic conditions, expected increase in net household income, and expectations to save a bit and/or have plenty over savings in the next 12 months”.

Businesses in their outlook for 2018, though also expect further improvement in the economy and further naira appreciation, they however express optimism that inflation and interest rates will decline during the year.

According to the Business Expectation survey for Q4,  “At 17.7 index points, respondents’ overall confidence index (CI) on the macro economy in Q4 2017 improved, when compared with the level of -29.0 index points recorded in Q4 2016. This was driven by the opinion of respondents from services (8.1 points), wholesale/retail trade (4.3 points), industrial (4.0 points) and construction (1.4 points) sectors.

“The outlook of businesses for the next quarter however, indicated greater confidence on the macro economy at 61.7points. The drivers for this optimism were services (23.8points), wholesale/retail trade (17.0 points), industrial (14.7 points) and construction (6.3 points) sectors.

“Respondent firms expect inflation rate to rise in the current quarter but fall in the next quarter, with confidence indices of 9.5and-9.8 points for the current and next quarters, respectively.

“Majority of the respondent firms expect the naira to appreciate in the current and next quarters as the confidence indices stood at 1.1and 39.2points, respectively. Similarly, respondent firms expect the borrowing rate to increase in the current quarter, but fall in the next quarter as the confidence indices stood at 6.3and -0.2points, respectively.”

CBN resume liquidity mop up with N656bn TBs

The CBN last week resumed liquidity mop-up in the interbank money market prompting cost of funds to rise slightly.

For two weeks, the apex bank suspended its weekly liquidity mop through issuance of secondary market (open market operations, OMO) treasury bills, leading to upsurge in excess liquidity to N856 billion the previous week, while cost of funds fell to year low.

Apparently worried over the impact of further increase in excess liquidity on other macroeconomic variables, the apex bank last week resumed liquidity mop up with OMO treasury bills worth N656.88 billion.

The outflow which more than offset impact of inflow of N136 billion from matured treasury bills caused average short term interest rate to rise by 196 basis points (bpts).

Data from the Financial Market Dealers Quote (FMDQ) revealed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 192 bpts to 5.67 percent last week, from 3.75 percent the previous week. Similarly, interest rate on Call lending rose by 200 bpts to 6.33 percent from 4.33 percent the previous week.

Baring further liquidity mop up by the CBN, analysts expect this trend to be reversed this week due to liquidity inflow of N148.16 billion from matured TBs.

Naira appreciates in I&E as CBN suspends intervention

The naira last week appreciated by 14 kobo in the Investors and Exporters (I&E) window while the CBN suspended its weekly dollar injection into the interbank foreign exchange rate. Data from the  FMDQ showed that  the indicative exchange rate for the window dropped by N360.82 per dollar from N360.96 per dollar the previous week.

The appreciation was prompted by upsurge in dollar supply which rose by 92 percent to $1.33 billion during the week from $689.53 million the previous week. The naira, however, remained stable at N365 per dollar in the parallel market.

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