Monetary Policy Makers Balk at Rising Inflation   by Lukman Otunuga

Feb 5 (Lagos) -  In January, the Central Bank of Nigeria (CBN) decided to hold the lending interest rate at 13.5 percent and significantly increase the Cash Reserve Ratio (CRR) from 22.5 percent to 27.5 percent. Far from following the global easing trend, the CBN is taking steps to tighten monetary policy.

The decision follows a worrying rise in inflation in December. Inflation rose to 11.98 percent, meaning that day-to-day living is becoming more expensive as prices for goods and services rise.

Part of the added inflationary pressures are because of border closures and food shortage fears.

On a long-term basis, the Naira’s softness feeds into the dam of rising inflation.

Despite the threat of higher inflation, the CBN has ruled out devaluing the Naira. Policy makers could have a point here. An even weaker local currency may trigger worse consequences. The overflowing dam could break and hyperinflation - a nightmare scenario for any emerging economy - could flood the economy.

The central bank’s reasoning for avoiding an official devaluation is that it holds ample foreign reserves to back the Naira’s value. Policy makers are also banking on rising Oil prices to shore up the $38.6 billion in foreign reserves, at the time of writing. The CBN brushed off the steep drop in foreign reserves from $42 billion to $38 billion in the last months of 2019, pointing out that fluctuations are normal.

written by Lukman Otunuga, is FXTM Senior Research Analyst.

reporting for on Wednesday, Feb 5 2020 from Lagos, Nigeria
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