June 14, 2016 / 11:40 AM / 3 years ago

UPDATE 2-Nigeria's annual inflation rises to above six-year high in May

(Adds details, quotes)

By Alexis Akwagyiram and Chijioke Ohuocha

LAGOS, June 14 (Reuters) - Annual inflation in Nigeria accelerated to 15.6 percent in May, its highest since February 2010, as the crisis in Africa’s biggest economy deepens.

Tuesday’s inflation reading was the fourth monthly increase in a row. The National Bureau of Statistics said it reflected higher prices for electricity, transport and food, a separate index for which rose to 14.9 percent from 13.2 percent in April.

“The increase in rates in May relative to April reflects an overall increase in general price level across the economy,” the statistics office said.

Usually Africa’s biggest crude producer, Nigeria has seen revenues plunge with oil prices, with pressure on the naira currency helping to fuel inflation.

Central Bank Governor Godwin Emefiele announced on May 24 that the naira’s peg to the dollar would be abandoned in favour of a flexible currency regime but has yet to give details of how the policy will work.

The bank’s de facto peg of 197 naira per dollar had become unsustainable due to a shortage of hard currency, with the naira trading at up to 40 percent below the official rate on the black market.

Razia Khan, chief economist, Africa at Standard Chartered bank, said the fixed FX regime “likely played a significant role in exacerbating current price pressures” and therefore would have been “instrumental” in prompting the policy U-turn.

“The challenge for the authorities is how to go about normalising the FX regime, and more broadly, activity in their bid to resolve fuel and other supply bottlenecks that have constrained growth while driving inflation higher,” she said.

Bismarck Rewane, economist and CEO of Lagos consultancy Financial Derivatives, said the promised adoption of a new flexible exchange rate policy was likely to “push up prices again”.

“The central bank may be forced to look at interest rates again next month,” he said, suggesting that there may be a need to tighten monetary policy after the new FX regime is in place.

The central bank’s main interest rate was hiked by 100 basis points to 12 percent in March to try to curb galloping inflation.

Nigeria’s economy contracted by 0.4 percent in the first quarter, the first such drop since the 1990s and Emefiele has said it is likely to shrink again in the second quarter, taking Nigeria into recession. (Editing by Ulf Laessing and Catherine Evans)

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