Cost of funds soars as inflation hits 11-year high

• Experts fear investments will suffer setback • Month-on-month rate decelerates
• ‘Inflationary environment may ease in December’

The cost of funds is expected to rise as the country records its highest inflation rate in 11 years.

The decreasing purchasing power of the naira as presented in government’s official records released by the National Bureau of Statistics (NBS) yesterday showed that the country’s spiraling inflation hit 18.3 per cent in October, a 0.4 percentage increase from the 17.9 per cent recorded in September.

Higher prices for consumer goods and services will raise the cost of funds and undermine government’s expectations on investments.

“This will mean that investors will require more and more money at higher interest rates from banks to put in the same level of investment, even at higher interest rates,” according to Mr. Adi Bongo, who teaches Economics at the Lagos Business School.

Bongo, in Lagos, yesterday told The Guardian that interest rates would naturally adjust with inflationary trends. He described the figures from the government’s data agency as “under-reported,” citing ‘street prices’ of packaged water, bread and cement as pointers to the actual percentage increases. “A big loaf of bread that was sold for N250 in October, now goes for N350. A keg of Cway Water was sold for N350 last month; it now goes for N550. This represents about 60 per cent increase. Also remember that there is time lag between data collection by the NBS and release of the information; a lot would have also happened to these prices.”

Mr. Abiola Rasaq, an investment analyst with the United Bank for Africa, said the high headline inflationary environment justified the high monetary stance of the MPC in the last two years. “Policy tools will remain tight to rein in inflationary pressure and stabilise the exchange rate,” he said.

Rasaq expects interest rates to remain high for some time. “High yield on fixed-income estimate means that the equity market will remain bearish as foreign investors remain concerned about the liquidity of the foreign exchange market in Nigeria,” he said.

He said the highest inflation record in 11 years notwithstanding, month-on-month percentage increase had slowed down in the last four months, “and that is an early signal that inflation rate may begin to moderate soon.” “The expectation is that it will begin to ease in December,” Rasaq said, hinting that inflation figures would hit 18.5 per cent in November.

The 11-year high record showed a sustained increase from 9.6 per cent recorded in January. The NBS in its report said increases were seen in all major divisions contributing to the headline index, during the month.

Highest increases were seen in housing, water, electricity, gas and other fuels, while communication, restaurants and hotels recorded the slowest pace of growth in October.

There are concerns about what the response of the Central Bank of Nigeria (CBN) to the new data would be, as the regulator plans the very last Monetary Policy Committee meeting for the year next week.

The apex bank had, in September, retained its two-digit benchmark rate at 14 per cent, after an increase in July by 300 basis points (three per cent) on the back of inflationary environment and volatility in foreign exchange market.