As the Monetary Policy Committee of the Central Bank of Nigeria (CBN) held its meeting last Thursday, there are indications that it will continue to hold rates but will either increase in cash reserve ratio (CRR) and Open Market Operations (OMO) to stem the rising inflation rate.

According to analysts at Financial Derivatives Company Limited (FDC), the MPC is facing the typical monetary policy ‘trilemma’ of increasing inflation, currency pressures and interest rate stability. “While a decrease in interest rates is politically expedient to stimulate economic growth, it may not be the appropriate move due to currency and inflationary pressures” the analysts noted in an emailed note.

Inflation has been on the rise in the country since the beginning of the year induced by the fuel scarcity, rising food prices and the devaluation of the naira. It increased consistently from 8.2 per cent in January 2015 to 9.2 per cent in June, according to data from the National Bureau of Statistics (NBS).

Inflation is expected to rise further in the coming months as the reality of the foreign exchange restrictions settle into the nation’s import-dependent economy. Already, some of the restricted food items have become scarce and where found highly expensive. Food items dominate the Nigerian inflation basket.

“The rising inflation is likely to be aberrational but the trend is becoming more consistent and is fuelling the fear factor. Anticipated inflation is more important than historical inflation because it influences consumer behaviour and preferences. Demand for goods will increase if people expect prices to rise in the near future.

“As demand increases, producers would be forced to increase prices up to a point that there is a struggle of bargaining power. At this level, it is the price elasticity of demand that determines if there would be further increase in prices. Another threat to inflation is the possibility and timing of the subsidy removal, which is now becoming more inevitable” the FDC analysts stated.

The value of the naira, though stable around N198 to the dollar at the interbank and N197 at the CBN, had dropped to its lowest at the black market where many now have to source foreign exchange from.

At the black market, the value of the naira sunk to N242 to the dollar and N367 to the British pound after the CBN listed 41 items as not eligible for foreign exchange at the interbank as well as bureaux de change (BDC).

Also benchmark interest rate stands at record high of 13 per cent, higher than Kenya’s interest rate of 11 per cent and South Africa’s 5.75 per cent although it is lower than Ghana’s 22 per cent benchmark lending rate.