Friday 27 April 2012
 

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Increase in headline and core inflation. Nigeria’s inflation rate increased to 12.1 per cent y/y in March 2012 (fig. 1), 20 bps higher than 11.9 per cent recorded in the previous month. In line with our expectation, the moderate increase in the headline index - composed of the core and food indices - was attributed to the planting season which led to an increase in market prices of food products and in increase in prices in the broad economy. The indices for food and all items less food increased in March as composite food index was higher y/y by 11.8 per cent and increased by 2.3 per cent on m/m basis. The rise in the food inflation was mainly due to the increasing cost of food products especially yams and other tubers as food products have become relatively scarce due to the drawdown from the end of year harvest. Core inflation index also rose by 15.0 per cent y/y and 4.5 per cent on m/m basis.
 

Increase was anticipated given prevailing economic fundamentals; in our inflation report for February (link: Nigeria: Inflation, February 2012), we projected that the decline in inflation rate recorded in February may not be sustainable. In February 2012, Nigeria’s inflation rate declined to 11.9 per cent y/y - 70bps lower than the 12.6 per cent recorded in the previous month. Our position was driven by the economic realities buttressed by the expansionary budget and proposed increment in electricity tariffs. The increase to 12.1 per cent was expected as the decline was not seen as sustainable. The NBS reported that the increase observed was moderated by lack of liquidity in the economy due to the delay in the monthly FAAC allocations amongst other issues. Meanwhile, we note that real rate in the economy remains positive given that average yields on government bonds and treasuries are ahead of inflation by c. 283 and 219bps respectively. (fig. 2) 
 

Overall, we maintain our stance on interest rates. Though the moderate increase in inflation rate might necessitate a decision to maintain, or increase, the monetary policy rate, we reiterate our position on the need to lower interest rates within the economy. As there is a need to critically consider the effect of a further increase in the benchmark rate. In our view, the lack of domestic production capacity and heavy reliance on non-oil imports – amongst other issues – suggests that inflationary threats cannot be successfully curtailed by the contraction of the monetary policy without a commensurate tighter fiscal stance or a redirection of government spending. Beyond the need to grow the domestic bond market to aid corporate access to long-term funding, our position is equally informed by the need for a sustainable growth of the real economy. 
 

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