Wednesday, May 4, 2016 9:12AM/ FDC
We are projecting a steep rise in YoY April inflation to 13.2%, 0.4% higher than that of March (12.8%). This will be the fourth consecutive monthly increase in 2016. If our forecast is accurate, it will be head-turning for the MPC which have barely recovered from the spike in March.
The lingering fuel scarcity was debilitating to economic activity and pressurised consumer prices in April. Additionally, rising transport costs and seasonality are also driving increase in costs of food staples and perishables.
A disequilibrated exchange rate and its distortionary impact on monetary stability is beginning to feed through the system for a prolonged period.
Upcoming MPC meeting
Following the 100 bps hike in MPR at the last MPC meeting, the CBN is under pressure to increase policy rates again. With real returns back in negative territory, the CBN will have to deliberate on the efficacy of using interest rates to contain the current inflationary trend. The absence of a foreign exchange policy, which still continues to be a major factor leading to uncertainty, has to be addressed at the MPC.
Inflation likely to remain high in May
We estimate a slight slowdown in inflation in May towards 12.5% due to consumer resistance following the sustained rise in consumer prices. As the production possibility frontier increases, prices of goods are expected to decline.
Regional Inflationary Trend
The inflationary trend across SSA continues to be a mixed bag. The countries that witnessed higher price levels were Ghana and Angola. The underlying reason for the increase in inflation was weakened currency
Ghana’s inflation rate accelerated to 19.2% in March from 18.5% in February due to sharp rises in transportation costs, clothing and footwear. Angola’s inflation rate was higher at 23.6% from 20.6% in February due to increasing healthcare, food and drink prices.
On the other hand, those that witnessed a slowdown are Kenya, South Africa and Uganda. Kenya’s inflation rate slowed down to 5.27% in April from 6.45% in March due to a slower increase in food prices.
South Africa’s inflation rate also declined to 6.3% in March from 7% in February due to a deceleration in petrol cost despite higher food inflation. Similarly, Uganda’s inflation rate slowed down to 5.1% in April from 6.2% due to slower rise in food and energy costs .
In a few weeks, African central banks will meet to deliberate on benchmark interest rates. We expect high inflation rate and lower growth forecasts to be the theme of discussion. |
Urban prices accelerated moderately in April
The FDC Lagos urban inflation index increased by 0.3%, from 10.96% to 11.26%. This was driven by the significant increase of 2.89% in the food basket despite a reduction of 1.17% in the non-food basket.
The year-on-year (YoY) food index increased to 15.33% from 12.44%, while the YoY non-food index decreased to 9.04%, from 10.21% in March. Seasonality is affecting food supply.
Likely Market Response
Treasury bill rates have been on the increase as investors factor both the rising inflation rate and the benchmark interest rates. We expect the upcoming MPC meeting to have a bearing on the direction of T-bill rates. Meanwhile, liquidity positions are expected to remain at current levels pending significant inflows, and we therefore anticipate interbank interest rates to trade within the band of 3%p.a-5%p.a.
We estimate the depletion of the external reserves to continue despite a slight recovery in oil prices to $47pb. Airline unremitted funds are currently in excess of $700 million and the import and payment cover is 4.4 months.
The stock market has lost 12.50% YTD partly due to interest rates, forex uncertainty and Moody’s downgrade. With fixed income being the preferred investment option given current macroeconomic conditions, the equity market is starved off system liquidity.
We expect intensified volatility in the stock market because of the likelihood of a hike in MPR as inflationary pressures increase. Capital flow reversal is also expected to persist as authorities maintain their rigid position on currency adjustment.