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Analysts see investors adjusting yields on inflation rise



Inflation rate will move up to end 2015 as slow economic growth heightens on persistent drop in oil price, a situation analysts say may prompt  investors to adjust  their yields expectation higher in order to cushion the impact.

Inflation in Africa’s biggest economy is expected to accelerate to 9.5 percent in December 2015, from 9.4 percent previously held as foods price continues to soar, according to analysts at Access Bank Capital Limited, in a January 12 note to BusinessDay.

Analysts at Access Bank added in the report that the core index should also inch up marginally on the back of pressure on the naira observed in the month of December.

“We forecasts 9.5 percent inflation rate and we believe it was partly driven by imported inflation, given the upward pressure on the NGN/USD,” said Tajudeen Ibrahim, Head Equity Research at Chapel Hill Denham in an email note to BusinessDay

“In response to higher inflation, we expect fixed income investors to seek higher yields on government and corporate bonds,” said Ibrahim

The legal tender depreciated in the parallel market to an all-time low of N280/USD during this period.

This will have an impact on core inflation given Nigeria’s reliance on imported raw materials, intermediate factor inputs and finished consumer goods, according to analysts at Access Bank.

A slump in crude prices by more than 70 percent to $31 has put pressure on the currency of Africa’s most populous nation biggest oil producer, pushing up consumer prices, and cutting government revenue.

Central bank Governor Godwin Emefiele imposed foreign-currency controls last year to stabilize the naira, restricting imports and adding to price pressures.

The naira is fixed since February at 197-199 per dollar since the introduction of series of restrictions to stabilize the economy and curb inflation. The currency traded at between  N285 per dollar on the streets on Tuesday compared with 278 naira on Monday at the parallel market.

The central bank unexpectedly cut its benchmark interest rate by 200 bps to 11 percent in November 2015.It is the first reduction since 2009.

Nigeria’s consumer inflation was 9.3 percent year on year in October last year compared with 9.4 percent in September, data from the National Bureau of Statistics showed, marking the first slow down since November 2014. Inflation crossed the central bank’s upper target of 9 percent earlier this year.

Analysts also added that hike in transportation costs as a result of fuel scarcity of last year eroded consumer discretionary spending hence weakling purchasing powers of consumer. Economist put a figure to it that the country lost as much as $1 billion due to disruption in economic activities.

This is the money that would have been spent by consumers if there were no strike between the fuel marketers and the federal government over disputed subsidy money.

“We expect the MPC to keep the MPR unchanged at its meeting of 25/26 January 2016. We think a further cut of the MPR is unlikely considering the significantly high banking system liquidity and the likely negative impact on inflation and FX,” said Ibrahim.