National Headline Inflation will decline to 7.64% in March




Friday, April 11, 2014 5.49 AM / FDC Economic Bulletin

The national headline inflation rate (CPI) is now at its lowest point since January 2008 and has been on a declining trend in the last 15 months. This has given the CBN some respite from its price-stability objective to focus on exchange rate management and control of liquidity conditions in the banking system. Based on our monthly analysis of the national consumer price index, we forecast a moderate decline in the headline inflation to 7.64% in March from 7.7% recorded in February. Our projection reveals a slower rate of change in consumer prices when compared to the same period in 2013.

Further to this, the continuous contractionary monetary policy by the CBN is expected to keep inflation muted in the near team. Also, the projection of a lower inflation rate coincides with the announced rebased GDP numbers. Most countries look towards achieving a high GDP growth rate in a low inflation environment. A high nominal GDP in a low inflation environment increases the fiscal and monetary policy options open to policy makers. As an attractive market, the increase in capital flows will boost the external reserves level and enable the CBN bring down interest rates later.



Inflation in a Rebased GDP Environment
Nigeria has moved up 10 places becoming the 26th largest economy in the world following the rebasing of its Gross Domestic Product (GDP). The country’s GDP increased by 89% from $270bn pre-rebasing to $509.9bn after the exercise, overtaking South Africa to become Africa’s largest economy. The massive leap in nominal GDP is attributed mainly to a more accurate reflection of the informal sector in the national accounts. Ironically, Nigeria’s GDP per capita moved up only 4 places to 121 globally and is three times lower than that of South Africa’s $7,507.67. However, income inequality continues to widen and the population under the poverty line is increasing (at 63.60% in 2010).

The projected growth rate post-rebasing has been estimated at 7.4%. While the GDP sounds relatively ac-curate, the projected growth rate of raises a lot of questions because it is difficult to see how such an exponential increase in the nominal GDP will be accompanied by an increase in the growth rate.

A high nominal GDP in a low inflation environment makes it likely that the MPC will maintain status quo at its next meeting in May. On fiscal policy, the new status as the largest economy in Africa increases the borrowing capacity of the FG due to the reduction of the debt to GDP ratio. Increase in fiscal spending in a pre-election year especially with the new GDP and debt to GDP profile is inevitable. Hence, any increase in government spending will have significant consequences on consumer prices.


Urban Inflation Inched up to 8.93%
In March, FDC’s Lagos urban inflation increased to 8.93% from 8.63% in February. The change was influenced by a 0.55% and 0.18% increase in the food and non-food baskets to 8.67% and 9.07% respectively. The increase is in line with the increase in global food prices. The spike in food prices recorded in the ur-ban centers is attributable mainly to a decline in supply resulting from the commencement of initial planting of crops in 2014. The increase in the non-food basket is associated with the resurging speculative pressure on the naira.

Likely Market Response

One more MPC Meeting before Hand Over

The MPC is scheduled to hold a meeting in May before the handing over to the new CBN Governor in June. The acting and designate Governors of the CBN have both vowed to protect the naira. Their pledge and drive to defend the currency may be feasible given the relatively stable inflationary environment. This is because the current monetary policy stance has achieved the price stability objective with the inflation rate within the target of 6-9% for 2014 and provides the CBN enough leeway to tinker with other monetary policy tools.

In addition, global inflationary pressures remain tilted towards deflation in developed economies and muted in emerging and developing countries. Nonetheless, risks to capital flight due to the US tapering on developing economies such as Nigeria will have profound implications on the currency. This implies that the tightening cycle of the CBN may not be over yet.

However, high oil prices between January and March at constant domestic oil output in addition to public outcry on fiscal leakages have contributed to the slight accretion in external reserves in the past week. Hence, the likelihood of the MPC maintaining status quo at its next meeting is very high.

Exchange Rates
The naira continued to experience volatility at the interbank due to increased demand pressures but remained relatively firm at the official and parallel markets. The naira depreciated by 16kobo to N164.89/$ in March from N164.73/$ in February at the interbank market, but remained unchanged at N172/$ at the parallel market. At the official market, however, the naira appreciated slightly to N155.74/$ from N155.75/$ in February. In addition, the spread between the official and interbank rates increased by N9.15 from N8.98 in the previous month. Despite the improvement at the official and parallel markets, the MPC expressed fears of increased pressure in the forex market in response to the unwinding of the assets purchase program by the US Federal reserve. The CBN’s aggressive position in defending the naira is expected to keep the naira relatively stable across all market segments in April. However, increased pressure, speculative trading of the naira and a continued decline in fiscal buffers could spur the inevitable monetary policy adjustment and depreciation of the naira in the near term.

Interest Rates
Short-term interest rates of OBB and ON were flat at 10.25%p.a. and 10.5%p.a. respectively for 15 consecutive days due to liquidity overhang. However, the average interbank rates increased by an average of 500bps in response to the N223bn mopped out of the system as CRR debit. OBB and ON rates rose to 14.83p.a. and 15.33p.a respectively. Money market rates are expected to ease upon the receipt of the monthly FAAC disbursement.

Equities and Fixed-Income Markets
The all share index of the Nigeria stock exchange gained 5.06% in the last month after a sharp YTD decline of 8.99%. The index rally was buoyed by companies year end results as investor interest in tier-one banks re-mained strong. The financial services sector staged a comeback, riding on the impressive full year 2013 results. However, the recent gain is a relief rally and the market is not expected to record any significant rise in the near term due to profit taking by investors. The low rate of inflation in addition to the bearish stock market enhanced investor sentiment for fixed income securities. YTD bond yields averaged 13.46% compared to 13.39% recorded in 2013, strengthening investors appetite for bonds in a stable inflation environment as an alternative to equities.

Furthermore, the newly rebased GDP numbers implies that the Nigerian market has potential and will serve as an alternative investment destination to international investors.


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