Inflationary Pressures to Feed Expectations for Further Yield Increases


Friday, April 16, 2021 / 08:30 AM / by CardinalStone Research / Header Image Credit: NBS

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According to the National Bureau of Statistics (NBS), Nigeria's headline inflation rose for the 19th consecutive month to 18.17% YoY (February 2021: 17.33% YoY). The current inflation reading surpassed our forecast of 17.90% and represented Nigeria's highest YoY inflation rate in 50 months. The sustained price pressure was primarily driven by another surge in food inflation (+116 bps to 22.95% YoY), which compounded the impact of a 29bps increase in core inflation to 12.67% YoY. On a month-on-month basis, headline Inflation rose by 156 bps, outpacing the 154bps reading in February 2021.


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Uncompromising food price pressure leads inflation charge

Food inflation hit a 12 year high of 22.95% in March 2021, following previous records set in the last two readings (January: 20.57%, February: 21.79%) as Nigeria grappled with supply-side constraints. Considering the relatively flat imported food inflation in March, pressures on the food basket may have reflected the impact of domestic factors such as the lingering insecurity and communal clashes in food-producing regions, lower rainfall volumes, higher energy and transport costs, and legacy logistics and structural challenges. In line with this view, the Famine Early Warning Systems Network (FEWSNET) reported that banditry and farmer/herder conflicts in food-producing regions continued to displace thousands (including small scale farmers) and erected route-to-market barriers in the review period. Elsewhere, the increase in core inflation was mainly due to rising transport costs, which may be linked to instability in fuel prices (PMS: +29.6% YoY). Higher energy costs may have also passed through to other core components such as clothing and footwear, HWEGF, and Restaurant and Hotels, which rose 32 bps on average on a year-on-year basis.

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We see scope for continued increases in fixed income yield in the near term

Sentiments are likely to remain bearish in the fixed income market as rising inflation rates combine with narrowing OMO maturities, successive rate hikes at the auctions, and a record fiscal deficit in bolstering the case for sustained yield increases in the near term. We also recall that the MPC has already indicated a willingness to combat inflation more aggressively if Q1'20 GDP turns out positive and inflation maintains its charge.


Traditionally, the committee's inflation containing efforts have often included rate increases and/or upward CRR adjustments geared towards reducing liquidity-induced currency pressure passthrough to inflation. We expect the committee may toe a similar path hinged on the strength of the recovery in coming quarters. Although the MPC voted to keep the Monetary Policy Rate (MPR) constant (citing the need to continue to support the economy following its mild recovery in Q4'20), its members notably expressed concerns about the adverse impacts of surging inflation in Nigeria. The 33.0% vote to increase the MPR rate at the last policy meeting signalled a growing discomfort over the prevailing domestic price trajectory that was only restrained by the need to allow economic growth to gain a more firm footing.


Thus, the imminent release of Q1'2021 GDP data may heavily influence the committee's subsequent policy action. On economic growth, we note that the recent ban on SIM registration may have inadvertently lowered output in the Telecoms sector (c.10% of GDP) in Q1'20. Still, the indirect effect of improved oil prices on economic activities is likely to cascade to another positive overall GDP reading in Q1'21 and pave the way for even more hawkishness.


No respite in sight in April 2021

We expect headline inflation to accelerate by 49bps to 18.66% YoY in April 2021 on the negative impact of insecurity and lean season. We expect inflation to plateau at 19.3% levels in July and subsequently moderate in H2'21 due to the high base effect from the prior year and, eventually, main harvests.

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