Headline inflation has retreated for the first time in 19 months, marginally, and this could influence the direction of the next Monetary Policy Committee (MPC) meeting next week.
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Ahead of next week’s monetary policy committee meeting, the National Bureau of Statistics (NBS) announced a surprise 5 basis points (bps) moderation in headline inflation to 18.12 percent.
This was due to temperance in food inflation (-23bps to 22.72% year-on-year (YoY)), which offset a 7bps increase in core inflation to 12.74 percent.
The headline inflation reading was 54bps shy of analysts’ 18.66 percent forecast for the review month and reflected notably benign month-on-month readings as shown below:
- Headline inflation slowed to 0.97 percent in April (versus 1.56% in March)
- Food inflation tapered to 0.99 percent in April (versus 1.90% in March)
- Core inflation came in at 0.99% in April (compared to 1.06% in March)
Food inflation remains the key driver. The highest increases were recorded in fish, meat, oils and fats, tubers, bread, cereals, potatoes, eggs and vegetables.
The rise in food prices has also been exacerbated by import restrictions on certain staples.
Despite the exchange-rate adjustments and the challenges in securing access to foreign exchange, relative stability in imported food prices was observed.
Analysts are of the opinion that the halt in inflation provides a hitherto muted argument for advocates of dovish monetary policy ahead of next week’s policy meeting.
In the previous two policy meetings, the doves have accumulated 100 percent (January) and 67 percent (March) of total votes to ensure that previously instituted stimulatory monetary measures remain in place.
With the MPC previously signaling plans to combat inflation head-on if growth strengthens and price pressures accentuate, the slowdown in inflation may have, once again, cemented the likelihood that the hawks would remain in the minority at the MPC and calmed expectations of an indicative rate hike even after a positive Q1’21 gross domestic product (GDP) report.
The urgency for a policy rate increase may have also been slightly watered down (from a currency perspective) by ongoing plans for Eurobond issuance, recovery in crude oil prices, increased inflow of remittances, and expected harmonisation of the official market and Investors & Exporters (I&E) FX rates.
It is therefore expected that the MPC at their next meeting might leave policy parameters unchanged.
The inflation numbers are also likely to limit the scope for material yield increases in the fixed income market ahead of the committee’s decision.
Inflation Outlook
The moderation in year-on-year food inflation may have reflected the initial impact of increased market supplies due to the effects of the dry season harvest, which commenced in April.
However, the combination of higher demand pressures (stoked by the recent festivities), elevated transport cost, and limited market functioning due to trade route disruptions may ensure that the risks to food inflation remain firmly biased to the upside.
On the core inflation front, energy prices are likely to remain the main conduit for potential inflationary pressures in the coming months.
Headline inflation is however expected to rise by 18bps to 18.30 percent YoY in May 2021 and likely re-engineer expectations for some yield increases.
