• Friday, June 21, 2024
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BusinessDay

Nigeria’s cost of borrowing may dip on analysts’ benign inflation outlook

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Nigeria’s cost of borrowing through fixed income instruments such as Treasury Bills and Bonds is expected to ease, based on analysts’ benign outlook for June inflation figures, three days to an official release by the National Bureau of Statistics (NBS).

The thinking of analysts is that the anticipated marginal decline in June’s inflation, which would be the first time this year, would mean Nigeria paying lower yields on her debt instruments.

The Economic Intelligence Group (EIG) of Access Bank, stated in a July 14 note to BusinessDay, forecasts inflation rate (year-on-year) to moderate downwards to 15.4% in June 2016.

“Our expectation for a downtick in inflation rate for the first time in 2016 is based on an anticipated downward movement in the food sub-index and core sub-index,” the intelligence group stated.

“The slowdown in the pace of advance in the food sub-index would be driven by decline in the prices of food items such as rice, tomatoes, and vegetable oil on the back of availability of Premium Motor Spirit (PMS) which may have aided transportation and distribution of these items.”

Similarly, FSDH Merchant Bank, in a July 7 note to investors, was a little optimistic about inflation figures, noting it expected June’s rate “to drop marginally to 15.39% from 15.58% recorded in the month of May 2016.

“We expect the marginal drop to come from decrease in the prices of tomatoes, beans and rice,” FSDH said in an emailed note to BusinessDay.

“The prices of food items that FSDH Research monitored in June 2016 dropped on the average, compared with May 2016.

The prices of tomatoes, Irish potatoes, rice and beans were down by 38.41%, 4%, 3.33% and 2.56%, while the prices of Irish potatoes, onions, vegetable oil, palm oil, fish and yam increased by 8.33%, 6.67%, 5.56% 5.56%, 1.96% and 0.46%,” FSDH noted.

Financial Derivatives Company, headed by Bismark Rewane, also expects inflation to fall 0.1 percent (year-on-year).

There is almost a one-month lag relationship that exists between inflation and yields, in other words a lower inflation figure in June should lead to a reversal in yield trend at the next auction in July, some analysts predict.

“This phenomenon is best seen looking at May’s rise in inflation rate to 15.6% (from 13.7%) and the CBN’s primary market auction in June, which saw treasury bills true yield for 91 day investment increase by over 200 basis points to 10.25% per annum, while the true yield for 364 day investment rose by over 400 basis points to 17.63% per annum in the previous auction,” the Economic Intelligence Group (EIG) of Access Bank stated.

Inflation forecasts gathered by BusinessDay unravel a divergence in views on the shape inflation  will take in June, ahead of next week Monday’s official release.

Spiralling food and fuel costs in Africa’s largest consumer market had driven inflation to a six-year high of 15.6 percent in May 2016.

However, on the flip side, some economists are not quite convinced that inflation will ease “As long as macroeconomic fundamentals remain weak,” said Olusegun Omisakin, a senior economist at the Lagos Chamber of Commerce and Industry (LCCI), in an emailed response to questions.

“Economic policy and planning are less than efficient, states’ economies are failing, unemployment rate has broken the usual threshold, and other social safety nets are fast disappearing.

“Major inflation drivers remain strong and the practical solution to our real sector challenge is eluding us,” said Omisakin.

Electricity, fuel and food costs were “key drivers” of inflation in May.

Food inflation accelerated to 14.9% from 13.2% in April, while the average price for a litre (0.26 gallon) of gasoline was N150.28 in May, compared with N162.82 the previous month, the statistics bureau noted.

As a monetary response to inflation, members of the Monetary Policy Committee (MPC) hiked interest rates by 100 basis points to 12 percent in March, from pre-levels of 11 percent.

Cash Reserve Ratio (CCR) was also increased to 22.5 percent at the meeting held March 22.

“We do not expect the Monetary Policy Committee to adjust its prevailing monetary policy stance on account of a one-off decline in inflation rate.

However, it is expected that the Central Bank will continue to channel intervention funds to critical sectors of the economy to stimulate economic activity and accelerate recovery from the imminent recession,” Access Bank’s EIG concluded.

The next meeting of the MPC is slated for July 25 and 26, according to the CBN’s calendar.

HOPE MOSES-ASHIKE & LOLADE AKINMURELE