Saturday, April 19, 2014

Finance experts say Nigerian inflation to rise in second quarter

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Nigeria’s inflation rate has fallen to the lowest and will start to rise in the second quarter, experts say.

Nigeria’s inflation rate which fell to about 8.6 per cent year-on-year (y-o-y) in March, from 9.5 per cent in February has reached its lowest and will begin to rise from the second quarter, finance experts have said.

The National Bureau of Statistics, NBS, in a report issued last week, said the Consumer Price Index, CPI, which measures inflation, rose by 8.6 per cent year-on-year in March. Relative to February, the report stated that relatively lower rise in the headline index could primarily attributable to base effects from March of 2012.

Nigeria’s inflation slowed to an almost five year low in March 8.6 per cent YoY in March, from 9.5 per cent YoY in February and 9.0 per cent in January. Inflation came in lower than the consensus expectation of some experts at 9.0 per cent.

“This slowdown was largely broad-based – food inflation slowed to 9.5 per cent YoY in March (compared to 11.0 per cent YoY in February), while core inflation (which strips out farm produce) dropped to 7.2 per cent YoY, from 11.2 per cent YoY. The sharper slowdown in core inflation was partly due to a fall in clothing and footwear prices,” Yvonne Mhango, Sub-Saharan Africa Economist, Renaissance Capital, an investment bank said.

“We think the slowdown in inflation in March was largely due to a high base effect rather than smaller price increases. We believe that inflation has bottomed and will pick up in 2Q13 to 9-10 per cent” she said.

Interest rate implications

Ms. Mhango said softening inflation and subdued credit growth may fuel arguments to cut the Monetary Policy Rate (MPR) and/or reduce the cash reserve requirement at the next Monetary Policy Committee (MPC) meeting in May.

“Weak credit growth and the softening of inflation in 1Q13 (we expect March’s inflation number that is due any day now to be in the 9-10 per cent region) may add to arguments to cut the MPR and/or reduce the cash reserve requirement at the next MPC meeting in May. However, the slowdown in the build-up of FX reserves in recent weeks, downside risks to oil production and the recent drop in the international oil price, have increased the risk to the naira and are likely to keep the MPC from easing policy in the near term. Our 2013 year end MPR projection is 11 she said” she said.

Bismarck Rewane, Financial Expert and Managing Director, Financial Derivatives Company (FDC) said the national headline inflation rate slowed to 8.6 per cent year-on-year (y-o-y) in March from 9.5 per cent in February, which was consistent with its earlier forecast of 8.7 per cent.

“This 0.9 per cent decline in the headline inflation rate makes the current CPI the lowest since April 2008 (8.2 per cent), as in February, the moderation was mainly attributable to base year comparison. This notwithstanding, there seems to be some fundamental downward drift in prices. All indices of the consumer price index moderated, with the food and core inflation easing to 9.5 per cent and 7.2 per cent from 11.0 per cent and 11.2 per cent in February respectively,” he said.

According to him, now that the headline inflation is below the 9 per cent benchmark, the interest rate debate will become more acrimonious and controversial. It will also lead to short position taking by fixed income traders and portfolio managers until May 21st the date of the next MPC meeting.

“The indicators that determine the direction of the benchmark rate appear positive except for the continuous weakening of the naira. In addition, credit to the private sector growth slowed to 8.1 per cent (equivalent to N15.26trn) y-o-y in March from 9.0 per cent y-o-y in February due to the hoist in debt yields to 10.5 per cent in March from the previous month’s 9.42 per cent,” he said.

Mr. Rewane said the depreciating value of the naira can be linked to the falling oil revenue resulting from the state of the oil sector where oil output is plummeting and global oil prices are falling below estimates” he said.

“In April, we expect an increase in the rate of inflation due to the wearing off of the impact of the fuel subsidy strike on the base year. Anticipated inflation is more important in determining the direction of monetary policy, especially under an ‘inflation targeting’ policy framework. However, several other factors such as the growth rate, exchange rate, and external reserves are also considered in monetary policy decisions,” he said.

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