Financial Derivatives Company (FDC), has projected that the nation’s consumer inflation may rise by 21.32 per cent in October from 20.77 per cent reported the previous month.
The FDC economic bulletin for the month of November stated that food inflation will rise by 0.62 per cent to 23.95 per cent, while core inflation will increase by 0.18 per cent to 20.5 per cent.
FDC stated that if the estimates are accurate, it will be the ninth consecutive monthly increase and the highest rate of inflation in 17 per cent.
It pointed out that the major inflation-stoking factors remain currency depreciation, money supply saturation, supply shortages, and logistics constraints.
Stating the reason why investors are fleeing stock market it said “increased deficit financing is making sovereign debts more attractive than equities stocks, revenue realization is only 42 per cent of projected half-year revenue while debt service amounts to 114 per cent of revenue and 66 per cent of recurrent expenditure funded through borrowing.
The report further explained that when the cost of borrowing money rises, bond prices usually fall, adding that high interest rates are favorable for bond holders but discouraging to bond issuers.
According to the report under situation of high inflation equity investors will sell off stocks for higher bond yields to make higher returns in their Investment.
FDC, however, stated that the planned redesign of the currency is unlikely to have any impact on the general price level since it will only involve a cash exchange and won’t essentially reduce the money supply.
It said that as evidenced by the naira’s free plunge in the parallel market following the announcement, the exchange rate has been severely impacted.
The notion that hoarding of currency notes outside the banking system is the primary cause of inflation is absolutely wrong. This is because cash and currency in circulation (N3.2trn) constitutes less than 7 per cent of the money supply (N48 trillion).
Citing an example, it said” the N5,000 you have in your wallet is less than 10 per cent of the balance on your bank account. Whilst M2 average growth rate in the last 5 years has been 12.5 per cent, the increase in cash has been minuscule compared to money supply growth. The new notes will not reduce inflation nor will they make the Naira stronger in the forex market. It is already trading at N875 to a dollar.”
