Nigeria’s inflation to decline marginally to 7.8 per cent – Report

Financial Derivative Company released its January Economic Bulletin.

The Financial Derivative Company, FDC, a diversified financial institution, has predicted that Nigeria’s December inflation would decline marginally to 7.8 per cent, from 7.9 per cent recorded in November.

“Our forecast is that the Consumer Price Index, CPI, will decline marginally to 7.8 per cent from 7.9 per cent in November. The price level is within the target range of the Central Bank of Nigeria, CBN, for 2014. The reasons for the moderation in the price level include the stability of the naira in the forex market and negative growth in money supply of 7.39 per cent in October 2013. Money Supply is now N14.73 trillion. Other factors include the higher rates of interest in the money markets and the contractionary stance of the Central Bank,” the firm said, in its January Economic Bulletin.

It highlighted that it was noteworthy that the base year prices in December 2012 were much higher because of the flood effect.

“Nigeria suffered from severe floods with a devastating impact on food production and transportation in 2012,” it said.

The report also revealed that urban inflation was also down.

“Our monthly survey revealed that in the Lagos area, the urban CPI declined by 0.26% to 9.43% in December. In 2013, the level of festivity was relatively subdued compared to the previous year. Most traders complained of less sales than usual. The food basket declined by 0.82% to 9.14% while the non-food was 8.07% compared with 8.39% in the previous month” the report stated.

Likely Market Response to this development varies, according to the firm. The report forecast that Nigeria’s Monetary Policy Committee would, in its next meeting scheduled for January 20 and 21 maintain the present monetary stance or even tighten it.

“The monetary policy environment has become more politically charged with the impending exit of the Central Bank Governor (Sanusi Lamido). Based on normal assumptions, we expect that the monetary stance will remain unchanged or even tighter. The AMCON bonds that have just been redeemed and the need to support the naira suggest that the Central Bank will be more hawkish. However, in view of the political tension and the lame-duck effect of the outgoing Governor, we expect the status quo to be maintained,” the report stated.

The report highlighted the impact of this anticipated decline and the MPC’s likely reaction on money market rates. It said in the event that there is further contraction by increasing the Cash Reserve Ratio (CRR) for public deposits to 75 per cent, the impact will not be as profound as earlier tightening cycles. This is because of the current excess liquidity in the system. Interest rates in January have averaged 10.71 per cent per annum and will re-main tentative till the MPC meeting.

On the whole, the report stated that a marginal decline in the headline inflation is not enough to trigger a change in the MPC’s policy to an accommodative stance. “Key macroeconomic indicators that are on the radar screen of the Central Bank include external reserves, oil production and fiscal spending. As we said earlier, the jury is out on the direction of monetary policy in a politically charged environment” the report stated.

The National Bureau of Statistics, NBS, was expected to release the inflation data for the month of December next week.

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