Increase in headline inflation. Nigeria’s inflation rate increased to 12.9 per cent y/y in April 2012 (fig. 1), 80 bps higher than 12.1 per cent recorded in the previous month. This was largely driven by non-food items captured by the “All items less farm produce” index. The higher y/y change was partly attributed to base effects as the index was relatively more stable in the corresponding period of the previous fiscal year. The increase in the headline index - composed of the core and food indices - was partially attributed to higher price levels in the broad economy. However, the NBS reported that the increase observed was moderated by lack of constant liquidity in the economy. The monthly composite CPI was higher by 0.13 per cent when compared with March 2012. The index for food was higher y/y by 11.2 per cent and increased by 0.2 per cent on m/m basis. The rise in the food inflation was mainly due to marginal increases of most food classes. Stripping out the cost of food, core inflation index also rose by 14.7 per cent y/y but inched up marginally by 0.1 per cent on m/m basis.
Inflationary trend gaining momentum as expected. We note the resurgence of inflationary threat which started in March after it moderated to 11.9 per cent in February 2012. However, this was anticipated as we highlighted that the moderation recorded in February which was 70bps lower than the 12.6 per cent recorded in the previous month was not sustainable at the time (Nigeria: Inflation, February 2012). Meanwhile, we equally observed that the current inflation rate at 12.9 per cent is the highest recorded since October 2010. Against the backdrop of the prevailing economic realities in the broad economy, we project that high inflation levels would persist in the short to medium term. We are however inclined to highlight that average yield on government securities are ahead of inflation by c. 100. (fig. 2)
However, we maintain our position on interest rates. Whilst we are aware of the fact that mounting inflationary pressures might necessitate a decision to increase the monetary policy rate, we reiterate our position on the need to lower interest rates within the economy. Rather, we recommend the adoption of other monetary policy tools e.g. monetary base, reserve requirements and adjustment of SLR/SDR, in pursuing its tight policy stance. We remain advocates of the critical need for growth in domestic production, and employment, achieved on the back of access to relatively cheap long-term funding by SMEs and mid-to-large-sized corporates. We believe this is crucial to easing the pressure on price levels and the domestic currency.
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