By Babajide Komolafe

Financial Derivatives Company (FDC) said that the three months increase in inflation rate will persist this month but with zero impact on the exchange rate of the naira.

Photo: toonpool

The inflation rate measures the rate at which prices of goods and services increase within a period of time.

The inflation rate has been on the upward trend since March. In March, it rose to 7.8 percent from 7.7 percent in February. It rose further to 7.9 percent in April, and 8.0 percent in May. The Financial Derivative Company predicted further rise to 8.1 percent in June and 8.2 percent in July.

The company, in its Economic Bulletin issued on Tuesday said. “The national headline inflation for June 2014 is projected to increase marginally to 8.1 percent in June. This is the first time it has risen above 8.0 percent in the last nine months. Although, the year-on-year (y-o-y) inflation has been within the CBN band of 6-9 percent for 2014, the trend in the last quarter has shown that inflation has been creeping upward. There have been three consecutive upward notches which were caused primarily by the steady rise in the food and core sub-indices of the CPI.

“In July, we are of the opinion that there would be a further increase in the headline inflation rate in spite of the commencement of the harvest season.” According to FDC, the steady rise in the inflation rate is driven by a combination of factors. These include: the steady growth in money supply; slow but steady impact of the new automotive policy on transportation cost; disbursement of capital votes under the 2014 budget; higher cost of power; and increased security spending.

The company was however of the opinion that the rise in inflation rate would not lead to a change in monetary policy by the Central Bank of Nigeria.

”In the event that the inflation rate comes in as forecast, it will be the fourth consecutive increase in the rate of inflation. We do not believe it will lead to a change in the monetary policy stance at the MPC meeting next week.

“If the increase in consumer prices continues and remains persistent, the market will anticipate an increase in interbank interest rates. However, the market is expected to remain square and tentative pending the MPC meeting while market liquidity continues to determine interest rate directions.

“The impact of a marginal increase in the headline inflation rate is expected to be neutral on the exchange rate in the near term. In addition, stakeholders would be keen on the direction of global oil prices and the impact on the external reserves as well as the country’s trade balance statistics.”