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Inflation Slows Sharply on the Swing of Base Effects

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Thursday, April 12, 2018 /01:08 PM/ARM Research

Nigeria’s headline inflation extended its moderating trend for the fourteenth consecutive month. The March Inflation report showed annual CPI dropping to 13.34% in March from 14.33% a month before. The outturn was slightly better than the 13.5% expected (ARM estimate). The fall was, in a broad sense, due to base effect and slowdown in energy price inflation. More specifically, the weakness was concentrated in food and transport.

Looking through the breakdowns, annual food inflation dipped 151bps to a nineteen-month low of 16.08%. Similarly, annual core inflation (which excludes prices of volatile agricultural produce) decreased 53bps to a twenty-four-month low of 11.2%. Overall, over Q1 18, headline inflation has moderated to 14.26% YoY on average (vs. average of 17.92% and 16.55% YoY in Q1 17 and FY 17 respectively).

Irrespective, MoM (month-on-month) headline inflation tracked slightly higher (+4bps to 0.84%) on the rise in MoM food (+5bps to 0.90%) and core (+9bps to 0.84%). On food, the MoM pressure stemmed from processed food which rose 64bps to 1.62%. We note that processed food MoM inflation has been rising since the start of 2018. On the core segment, the rise in MoM inflation stemmed from increases in HWEGF1 basket (+8bps to 0.69%), Education (+8bps to 0.82%) and Clothing & Footwear (+3bps to 0.79%).

The increase in the HWEGF basket is quite surprising to us given the moderation in energy prices over the month, according to data from the NBS. Specifically, on average, Kerosene (-6.8%), Premium Motor Spirit (-5.3%), Cooking Gas (-3.0%) and Diesel (-1.65%) were lower on a MoM basis. We think the increase is most likely tied to higher housing prices during the month.

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 In terms of impact, with the sharp decline in headline inflation, currency stability and sharp accretion in the reserve (~$47 billion), the CBN is expected to accelerate its signaling of a rate cut with a slash in OMO stop rates at today’s auction. The CBN is looking to net-issue N33 billion (Issuance – N500 billion, Maturity – N467 billion). To our minds, we expect the apex bank to cut the rate on the 245- day to ~14% (prior auction: 14.3%) and close the year at 13%. On its traditional policy instrument, we hold the view that the MPC would cut the MPR by 200bps in H2 2018 to 12% in line with waning inflationary pressures.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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