Thursday, July 14, 2016 12.29PM/ Access Bank Plc/ Economic Intelligence Group
The National Bureau of Statistics (NBS) is scheduled to release the inflation figure for June 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 moderate downwards to 15.4% in June 2016 from 15.6% posted in May 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
· Our expectation for a downtick in inflation rate for the first time in 2016 is based on an anticipated downward movement in the food sub-index and core sub-index.
· The slowdown in the pace of advance in the food sub-index would be driven by decline in the prices of food items such as rice, tomatoes, and vegetable oil on the back of availability of Premium Motor Spirit (PMS) which may have aided transportation and distribution of these items.
· The core index should also descend marginally due to slight change in consumer behavior witnessed during the review period towards imported goods. Therefore, weak demand for imported items is expected in June as higher prices in the previous month may have caused cutbacks in consumption spending.
Probable Market Impact Points
Money and Fixed Income Market
· Our June inflation expectation of 15.4% still leaves the real rate of return in negative territory.
· Yields in the fixed income market may start to trend downwards as inflation rate begins to descend. There is almost a one-month lag relationship that exists between inflation and yields. This phenomenon is best seen looking at May’s rise in inflation rate to 15.6% (from 13.7%) and CBN’s primary market auction in June which showed treasury bills true yield for 91 day investment increase by over 200 basis points to 10.25% per annum while the true yield for 364 day investment rose by over 400 basis points to 17.63% per annum in the previous auction. Similarly, a lower inflation in June should lead to a reversal in yield trend at the next auction in July.
Monetary Policy Responses
· We do not expect the monetary policy committee to adjust its prevailing monetary policy stance on account of a one off decline in inflation rate.
· However, it is expected that the Central Bank will continue to channel intervention funds to critical sectors of the economy to stimulate economic activities and accelerate recovery from the imminent recession.