In September, Nigerian inflation on a month-on-month basis rose at the slowest pace since November 2016 (0.78 percent) and capped four straight months of decline since June, a development likely to test the Central Bank’s resolve to hold interest rate at a record high 14 percent amid weak economic growth.
The consistent slump in the rate of inflation on a year-on-year basis since the start of the year has not been enough to force the CBN’s hand to cut interest rates at any of its policy meetings this year, as the monthly trend offered little respite.
In the eight months through January and September that annual inflation declined, the monthly trend fluctuated, rising a combined three times, according to data compiled by BusinessDay and sourced from government-funded National Bureau of Statistics (NBS). This left much to desire for the CBN.
However, the monthly inflation trend has since changed, with prices rising at a slower pace since June. In the latter month, prices rose to 1.58 percent compared to 1.88 percent in May. The index slowed 1.21 percent in July, 0.97 percent in August and 0.78 percent in September.
“The trend in monthly inflation beats expectations, as we initially felt it would not materialise,” said Tajudeen Ibrahim, head of research at Lagos-based investment firm, Chapel Hill Denham.
“It makes a compelling case for the CBN to cut interest rate before the end of the year,” Ibrahim said by phone. “It could also translate to lower borrowing costs for government and the private sector.” The CBN, at its last meeting in September, signalled a likely rate cut in 2018 at the earliest.
Nigerian inflation rate cooled to 15.98 percent from 16.01 percent in August, the government-funded National Bureau of Statistics (NBS) said Tuesday, for the eight month running. Nigerian stocks halted a 3-day gaining streak, as the All Share Index shed 0.81 percent.
While headline inflation rate has been declining since the start of the year, it has been outside the central bank’s target range of 6 percent to 9 percent for more than two years even as policy makers raised the key lending rate to a record high of 14 percent, spurring other analysts to opine that the CBN is unlikely to cut rates in the short term.
“The reduction in month-on-month inflation is partially due to a slight appreciation of the naira and availability of forex in the market during the period under review,” said Bismarck Rewane, CEO of advisory firm, Financial Derivatives Company.
“This has been complemented by an improvement in power supply, which increased from an average of 3,352.97MW/hr to 3,432.97MW/hr in September,” Rewane said before the inflation report was released.
A decline in crude oil prices and militant attacks that crimped production volume, caused a dollar shortage in Africa’s biggest oil producer and led to a weaker naira and increased import prices, stoking inflation to an eleven year high of 18.7 percent in January 2017, according to data compiled by BusinessDay. These factors also contributed to tipping the economy into its first recession in a quarter of a century, before expanding 0.6 percent in the three months through June.
Dollar supply has however improved since the central bank started easing currency-trade controls, and introduced a window where portfolio investors and importers can buy foreign currency at market-determined rates. This drove down inflation, though base effects also play a part in the trend.
The naira appreciated by less than a percent to N360.17 per US dollar Tuesday, according to data by trading platform, FMDQ.
“With consumer prices stabilising, the CBN could be offered a pass to cut benchmark interest rates, as inflationary pressures become a diminishing theme,” said Lukman Otunuga, a research analyst at forex brokerage firm, FXTM.
“Confidence over the Nigerian economy has steadily improved this year, amid their improving macro fundamentals. The long term outlook is encouraging, as the nation continues its quest to diversify resources and break away from oil reliance,” Otunuga said by email.
Meanwhile, food inflation bucks the trend in monthly and annual inflation, as food prices rose 20.32 percent from a year earlier, compared with 20.25 percent in August, driven by the costs of potatoes, meat and oils and fats, according to the NBS.
Floods in Benue state last month have kept food prices high, negating some of the benefits of the increased availability of foreign exchange, the CBN said in September.
Analysts at Vetiva Capital are however optimistic that food prices will turn the corner.
“There are promising signs that inflationary pressures are abating, particularly on food prices.
“Amid easing food prices and the impending harvest season, we are cautiously optimistic and lower our inflation forecast for the rest of the year – we estimate 15.8% y/y inflation for October and 2017 average annual inflation of 16.5% (previous: 16.6%),” Vetiva analysts noted.
The International Monetary Fund (IMF) expects Nigeria’s inflation rate to remain elevated at double-digit levels this year and in 2018.
This is based on its assumption of the persistent effects of past inflationary shocks coming from sharp currency depreciations (including the parallel market exchange rate), higher electricity and fuel prices, and an accommodative monetary policy going forward.
The IMF expects an average inflation rate of 16.3 percent in 2017 and GDP growth rate of 0.8 percent.
