Inflation rises to 10.3%, beats CBN’s target

oct 15, 2011- Nigeria’s headline inflation rose to 10.3 per cent in September, beating the Central Bank of Nigeria (CBN) single-digit target. The rise in inflation came to many as a surprise because of six official interest rate rises by the apex bank this year. The inflation was 9.3 per cent in August, snapping three straight months of declines, the National Bureau of Statistics (NBS) said.

Food prices, the largest contributor to the consumer index, rose 9.5 per cent year-on-year in September after 8.7 per cent the previous month. “The biggest contributors to the consumer inflation were the high prices of electricity and food items, even as the rise in food prices was mainly due to the increasing costs of yam, cooking oil and fish,” the NBS document said.

The CBN has been raising interest rates for more than a year to help curb high inflation and support the naira which plunged to an all-time low this week. CBN hiked its benchmark interest rate by a much bigger-than-expected 275 basis points to 12 per cent and implemented several other tightening measures at an emergency meeting on Monday.

The naira recovered from the record low of 167.8 to the dollar on Monday, after the CBN sold around $1 billion into the market in the space of a week, traders said. But trading on the local currency remains volatile and further weakness would add to inflation pressures.

The local currency was trading at 164.85 against the dollar mid-session yesterday. The naira weakness is likely to be temporary and as monetary tightening measures take effect the local currency should strengthen, the CBN Governor, Sanusi Lamido Sanusi said.

The naira slumped to its lowest ever on Monday, just before an emergency CBN meeting where interest rates were hiked far further than analysts expected and several other tightening measures were imposed.
But trading on the local currency remains volatile with dealers not willing to quote actively. The naira ended the week at 164.05 in the interbank market, far weaker than at the central bank’s auction on Wednesday when the regulator sold $591.67 million at 150 naira to the dollar.
“The acceleration of inflation in September validates the Monetary Policy Committee’s significant tightening measures earlier this week. We expect the significant depreciation of the naira in October to compound the existing inflationary pressures, through higher imported inflation,” said Yvonne Mhango, economist at Renaissance Capital.

Although monetary tightening measures are will help temper inflation in coming months, upward price pressures are on the horizon, including higher public spending and fuel prices. Nigeria’s government unveiled a four-year fiscal plan this month, which showed spending in the 2012 budget will increase from this year, although the fiscal deficit should decline. It also announced the forthcoming removal of fuel subsidies, which the government said cost the country N1.2 trillion this year.

Meanwhile, the CBN has said it will restrict the sale of dollars at its auctions to foreign companies taking the currency offshore, in a further measure to limit local foreign exchange demand and support the weakening naira. The regulator said foreign investors were guaranteed to repatriate their earnings and proceeds of investments offshore but they could only seek dollars for such purposes from the open market, limiting forex demand at its auction. “All remittances in respect of dividends, capital and proceeds of investments shall be through the use of autonomous funds (interbank),” CBN Director, Trade and Exchange, Batari Musa said in a circular to banks.
“For the avoidance of doubts, foreign investors are guaranteed repatriation of their earnings and or proceeds of investments through the use of autonomous funds,” he said.