Analysts see inflation remaining elevated as focus shifts to MPC meeting

Nigeria’s inflation will remain elevated throughout the first-quarter (Q1) of 2024, according to analysts whose commentaries were collated following the release of inflation report for January 2024.

The National Bureau of Statistics (NBS) report shows January inflation rate reached new high of 29.90 percent in January 2024, compared with 28.92 percent in December.

While the nation’s inflation rate inches closer to 30percent, its new 27-year high, analysts attribute it to lingering effects of past reforms and more importantly, the security challenges in food-producing states.

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The first Monetary Policy Meeting (MPC) meeting under the tenure of Olayemi Cardoso as the Governor of the Central Bank of Nigeria (CBN) has been scheduled for February 26 and 27.

“Most of the pressures remain skewed to food, fuelled by the rising cost of production, elevated transport prices, and sustained insecurity concerns,” CardinalStone research analysts said.

“Core inflation remains biased to the upside, ticking up by 53 basis points (bps) in the review period. We attribute the uptick to the sustained currency pressures, given that the naira at the official market has depreciated by circa 39.7percent year-to-date (YtD).

“Given that the CBN has guided that the current inflation trajectory requires further tightening, we see legroom for about 150 basis points (bps) – 200bps increase in policy rate at the February MPC meeting,” CardinalStone analysts said in their February 15 note.

Chinwe Egwim, chief economist at Coronation Merchant Bank said in February 16 note that, “Inflation continues to be driven by structural issues such as high logistic costs, poor infrastructure, storage issues, exchange rate pressure, elevated cost of PMS as well as insecurity (especially in food-producing areas)”.

“The first MPC meeting under the tenure of the new CBN Governor, has been scheduled for the 26th and 27th of February 2024. The CBN plans to hold six meetings in 2024. We expect a rate hike at the upcoming MPC meeting. We expect inflation to remain elevated in first quarter (Q1) 2024, followed by modest declines on the back of positive base effects and restrictive monetary policies,” she said.

Food inflation (35.41percent) at a new 19-year high recorded an increase of +148 basis points (bps) in January 2024 when compared with the previous month.

“The highest increases were recorded in the prices of bread, cereals, oil and fat, meat, milk, fruits, coffee, tea, fish, potatoes, cocoa, yam, and other tubers. On a year-on-year (y/y) basis, imported food price inflation increased by +140bps to 26.30percent y/y from 24.90percent y/y recorded in the previous month,” Egwim noted further.

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Federal Government says it will soon establish a National Commodity Board tasked with the responsibility of regulating food prices and managing strategic food reserves.

Also, the Ifeanyi Uba-led team of Comercio Partners research analysts in their February 15 note said, “Riding into 2024, Nigeria’s inflation data continues its upward trajectory. The Giant of Africa has maintained its onward inflation trend for over 12 consecutive months with no easing in sight, given that no mitigating measures have been adopted to curb this from playing out”.

“Killings and displacement in the North remain incessant, further altering the outlook for farming activities, such as land preparations, which usually commence in February. Despite the government’s efforts to put the relentless insecurity issues in check, Improvised Explosive Devices (IEDs) are now being utilised by these insurgent groups, causing further havoc.

“With over 8,500 people displaced in January 2024, which was more than the total number of Internally Displaced Persons (IDPs) in December 2023, prospective harvest distribution and trading activities were disrupted as a result of this,” Comercio Partners research analysts said.

“Furthermore, the effects of elevated fuel prices and transportation costs trickle into food and commodity prices, fuelling inflation in the Nigerian economy. While we remain hopeful and anticipate Dangote fuel products to hit markets, food produces from the 500,000 hectares food plan, cocoa processing in the west and effective monetary and fiscal policies implemented to improve our FX, amongst other aspiring strategies, we forecast sustained elevated inflation in subsequent months,” they added.

Ibukun Omoyeni, economic research analyst at Vetiva said, “In February 2024, we see inflation nudging higher to 31.12 percent year-on-year (y/y). As a result of a sizeable devaluation of the Naira in the official window (circa 25percent in January 2024), we expect significant upward PMS price adjustments to consumer prices over the coming months”.

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“This will in turn fuel further uptick in farmgate prices, which are expected to take a hit from the disruption of dry season cultivation activities in food-producing regions. Thus, we raise our average inflation estimate by 270bps to 32.9percent y/y in 2024 (2023: 24.50percent y/y),” Omoyeni said.

The Vetiva research analyst further said in February 16 note that, “On February the 26-27, the Cardoso-led MPC will hold its first meeting. We expect the Committee to consolidate on its hawkish moves so far, to improve the real rate of return, and slow down the pace of depreciation in the Naira. We expect a sizeable 100 basis points (bps) hike in the Monetary Policy rate and further Corridor rate/Cash Reserve Ratio adjustments in a bid to sterilise liquidity and keep money supply under control”.

“In recent times, the apex bank has turned in a lot of circulars to address the foreign exchange market. While the exchange rate was allowed to move freely at the official market, the Bank has churned out policies to boost remittance inflows, slow repatriation of export proceeds, clear verified FX backlogs, and put a check on the speculative activities of banks.

“Nevertheless, the Naira has been on a free fall in both the official and parallel markets. We attribute this to materially lower net external reserves, weak buffers, and inadequate FX supply. “While official sources are yet to confirm FX raising efforts, Nigeria may resort to multilateral agencies or tap the Eurobond market to boost FX supply, subject to global financing conditions induced by a possible pivot in the US Fed’s monetary policy,” Omoyeni further noted.