Agusto & Co: Supplementary Budget, FAAC Allocation Might Worsen Inflation
Agusto & Co, a prominent credit rating agency, cautions that despite a recent slight moderation in Nigeria’s inflation, the threat of sustained inflation remains due to several impending fiscal measures.
According to Agusto & Co, the proposed supplementary budget, increased FAAC allocations, and the planned minimum wage increase could reignite inflationary pressures.
Its monthly newsletter published on Friday read: “The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of ₦6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the ₦70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process.”
These factors, coupled with existing economic challenges such as food supply disruptions and the high cost of fuel, present a complex environment for the Central Bank of Nigeria’s monetary policy efforts.
Agusto & Co also noted that the Central Bank of Nigeria (CBN) is expected to maintain the current policy rate at its upcoming Monetary Policy Committee (MPC) meeting in September 2024.
This decision will be based on the recent inflation data that validates the CBN’s tightening stance.
The consistent month-on-month decline in inflation since March and a slower year-on-year increase in the latter half of H1 2024 suggest that contractionary measures are effective.
With Q1 2024 GDP growth showing signs of strain due to rising borrowing costs, the CBN may adopt a “wait and see” approach, holding the policy rate stable to monitor inflation trends, exchange rates, and upcoming Q2 GDP data before deciding on further policy adjustments.
The newsletter read: “The latest inflation data vindicates the CBN’s tightening monetary policy stance. The consistent moderation in month-on-month inflation since March, coupled with a slower pace of year-on-year increases in the latter half of H1 2024, reinforces the CBN’s conviction that the contractionary monetary measures are yielding positive results.
“The CBN, at the last MPC meeting in July 2024, re-emphasised commitment to stay on course with the tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains thus far achieved. While acknowledging the recent progress made, Governor Cardoso hinted at potential rate cuts in the future if inflationary pressures continue to ease.
“Given tepid GDP growth numbers in Q1 2024 amid a constrained business environment, worsened by rising borrowing costs, the CBN could decide to ‘wait and see’ and hold the policy rate stable at its next meeting in September.
“This strategic pause would allow it observe the trend of inflation and the exchange rate in the coming months as well as the Q2 2024 GDP growth numbers before making further adjustments to its monetary policy stance.”
However, the credit rating agency noted that while most inflation sub-indices have aligned with the headline index, the persistent structural issues reflected in the core inflation indicate that the risk of inflationary pressures resurging remains significant.
The agency also added that the underlying factors contributing to inflation, particularly those linked to structural elements, continue to pose a threat, making the possibility of further increases in inflation a real concern.
SOURCE: Nairametrics
