Friday, August 12, 2016 3.49pm/ Access Bank Plc/ Economic Intelligence Group
The National Bureau of Statistics (NBS) is scheduled to release the inflation figure for July 2016 in the coming days, based on the Data Release Calendar available on the Bureau’s website.
The Economic Intelligence Group forecasts inflation rate (year-on-year) to accelerate to 17.2% in July 2016 from 16.5% posted in June 2016.
Our methodology adopts an autoregressive analysis of past prices, while it recognizes all the assumptions used by the National Bureau of Statistics (NBS) in its computation of monthly composite consumer price index (CCPI).
Inflation Forecast Drivers
· The expected upward momentum in headline inflation in July reflects increases in both food and core components of inflation.
· The food component which has the largest weighting in the inflation basket will be responsible for a substantial amount of the overall price pressure. The uptick in prices from items such as fish, meat, vegetables and bread on the back of higher transportation and distribution cost will push inflation rate for the month of July higher.
· The core index should also inch up slightly due to cost push factors on the back of continued depreciation of the Naira. The local currency depreciated more than 28% against the green back in the interbank and parallel market over the levels in June. The pass-through effect will be seen in the prices of imported items such as motor car and vehicle spare parts. Increases in cost of passenger transport by air will further drive the core index higher.
· The nation’s reliance on imports of raw materials, refined products and consumer goods implies that a weaker naira will compound the effect of imported inflation.
Probable Market Impact Points
Money and Fixed Income Market
· Rising inflation will throw real returns for investors further into negative territory.
· We anticipate an uptick in yields across the curve as the market continues to price in the effect of higher inflation rate.
Monetary Policy Responses
· We envisage that the Central Bank’s monetary policy committee will continue to maintain its tightening posture in the second half of the year. In the last MPC meeting, in spite of recessionary risks, the Central Bank MPC increased the MPR by 200bp to 14% in a bid to dampen the FX pass-through and attract foreign investment inflows.
· Whilst it has been noted that the nation’s rising inflation is not driven by systemic liquidity but rather by structural constraints, we expect the Central Bank to continue to mop up liquidity in the system using the Open Market Operations (OMO) as observed in the month of July.