Inflation Moderation Could Cool off Immediate Rate Hike Talks


Tuesday, May 18, 2021 / 09:44 AM / by CardinalStone  Research / Header Image Credit

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Inflation Halts Its 19-month Acceleration

Ahead of next week's monetary policy committee meeting, the National Bureau of Statistics (NBS) announced a surprise 5bps moderation in headline inflation to 18.12%, as temperance in food inflation (-23bps to 22.72% YoY) offset a 7bps increase in core inflation to 12.74%. The headline inflation reading was 54bps shy of our 18.66% forecast for the review month and reflected notably benign month-on-month readings as shown below:

  • Headline inflation moderated to 0.97% in April (vs 1.56% in March)
  • Food inflation tapered to 0.99% in April (vs 1.90% in March)
  • Core inflation came in at 0.99% in April (compared to 1.06% in March)


We believe the halt in inflation provides a hitherto muted argument for advocates of dovish monetary policy ahead of next week's policy meeting. In the previous two policy meetings, the doves have accumulated 100% (January) and 67% (March) of total votes to ensure that previously instituted stimulatory monetary measures remain in place. With the MPC previously signaling plans to combat inflation head-on1 if growth strengthens and price pressures accentuate, the slowdown in inflation may have, once again, cemented the likelihood that the hawks would remain in the minority at the MPC and calmed expectations of an indicative rate hike even after a positive Q1'21 GDP report.


The urgency for a policy rate increase may have also been slightly watered down (from a currency perspective) by ongoing plans for Eurobond issuance, recovery in crude oil prices, increased inflow of remittances, and expected harmonisation of the official market and I&E FX rates. We, therefore, expect the MPC to leave policy parameters unchanged at the coming policy meeting. The inflation numbers are also likely to limit the scope for material yield increases in the fixed income market ahead of the committee's decision.


What Next for Inflation?

In our view, the moderation in year-on-year food inflation may have reflected the initial impact of increased market supplies due to the effects of the dry season harvest, which commenced in April. However, the combination of higher demand pressures (stoked by the recent festivities), elevated transport cost, and limited market functioning due to trade route disruptions may ensure that the risks to food inflation remain firmly biased to the upside. On the core inflation front, energy prices are likely to remain the main conduit for potential inflationary pressures in the coming months, with authorities seemingly tilting towards a potential downstream deregulation that could “bite” before it “heals” the cost of living of the populace. We expect headline inflation to rise by 18bps to 18.30% YoY in May 2021 and likely re-engineer expectations for some yield increases.


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