KPMG has said that the effectiveness of the Central Bank of Nigeria’s (CBN) monetary tightening strategies may fall short unless Nigeria addresses the underlying supply-side constraints fuelling cost-push inflation.
In issue 15 of the Flashnotes publication of KPMG in Nigeria, which was seen by TheWitness, the firm emphasised the need for a balanced approach that tackles both demand-pull and cost-push inflationary pressures.
It called for collaborative efforts between fiscal and monetary authorities to dismantle the supply-side barriers contributing to inflation.
The document read:
According to KPMG, a potential slowdown in inflation rates is on the horizon post-mid-2024, largely attributed to statistical base effects.
However, this expected deceleration depends on the absence of new economic policies that might exert upward pressures on prices.
The firm advised against attributing any reduction in inflation rates solely to monetary policy tightening, highlighting the influence of broader economic factors and policies.
KPMG said:
The CBN’s decision to elevate the Monetary Policy Rate (MPR) to a historic high of 24.75% in March 2024 is expected to attract more foreign exchange inflows, driven by the appeal of higher interest rates. KPMG projected that these inflows will primarily come from portfolio investments, seeking to benefit from the increased rates.
However, the firm also cautioned about the potential volatility associated with these “hot money” inflows, noting the risks of sudden reversals that they pose to macroeconomic stability.
KPMG said:
Already, Nigeria has recorded about $3.8 billion foreign capital inflow in the first quarter of 2024 with investors (especially foreign investors) interested in government securities for high yields.
KPMG further noted that the quest for price stability may inadvertently sacrifice economic growth. With Nigeria’s growth trajectory already on a decelerating path, the current policy stance could further deter investments in the real sector, negatively affecting employment and growth.
The firm warned that high borrowing costs and a restrictive monetary environment might lead to an increase in non-performing loans and challenge the government’s ambitious goal of expanding Nigeria’s economy to a $1 trillion economy within the next eight years.
The firm said:
Analysts at Augusto & Co earlier said that President Bola Tinubu’s plan to reduce interest rates in the country may clash with the existing tightening monetary policy of the CBN. They noted that the president’s preference for lower interest rates to support economic growth raises the risk of inaction and will be a true test of the CBN’s independence.
However, so far, the CBN has shown its independence with a hawkish monetary stance.
