August 2022 SSA Inflation Update – Inflation remains high despite signs of relief

What shaped the past week?

Global:  Global markets remain in a tailspin as investors are unnerved by the prospects of a global recession due to an increasingly tense geopolitical environment and tightening measures from central banks. The latest policy decisions from central bankers across the globe remain in focus, as investors believe the fight against inflation will have some knock-on effects on global growth in the coming quarters. Starting in the Asia-Pacific region, all key indices in the region fell sharply this week; the Shanghai Composite sank 2.72% w/w, with the Japanese Nikkei-225 falling 4.48% w/w, and the Hong Kong Hang Seng falling 5.10% w/w. Still in the region, economic reports from Japan and China showed that Japan’s industrial production grew 2.7% in August, while retail sales were up 1.4%. Meanwhile, in China, official data showed that the manufacturing sector grew in September albeit at a weaker pace. Moving to Europe, where the focus remains on high energy prices, investor outlook on the region’s economy remains lukewarm as governments prepare to provide energy stimulus checks to households and businesses in the region; for the week, the German Dax sank 3.3% w/w, while the French CAC and London FTSE closed lower, falling 2.64% and 4.34% respectively. Finally, in the United States, economic uncertainty in the world’s largest economy, weighed on markets in the region as investors process the latest developments with the Ukraine-Russia war, as well as policy decisions from key central banks. The U.S. saw yields surged to 4.0% levels this week, highlighting investors’ concerns over America’s growth prospects in coming quarters. As investors continue to react to the latest decision from the U.S. Federal Reserve, we saw the S&P 500, Nasdaq and Dow Jones trade lower w/w, down 2.37%, 2.53%, and 2.35% respectively at time of publishing. 

Domestic Economy: For the third time this year, the Monetary Policy Committee (MPC) delivered another hawkish decision. The Monetary Policy Rate (MPR) was raised by 150bps to 15.50% and the Cash Reserve Ratio (CRR) was raised 500bps to 32.5%. The decision was driven by the committee’s desire to reduce the negative real rate of return and curb growth in money demand. Although the hikes will not address structural inflation, they may reduce monetary-induced inflation from the electoral campaign season. Looking ahead, a rate hike at the last MPC meeting of the year will be dependent on the direction of inflation in Q4’22.

Equities: It was a mixed week of trading across the equities space, as the latest rate hike decision from the Central Bank of Nigeria, has driven investor sentiment across the local capital market space. The Consumer Goods space was the worst performer this week, sinking 3.37% due to losses observed in NESTLE; the counter sank 10.00%, to settle at ₦1215/share. Likewise, in the Banking space, losses observed in ACCESSCORP, and UBA weighed on the sector’s performance (-0.89% w/w); the counters sank 8.52% and 4.11% respectively to settle at N8.05/share and N7.00/share respectively. On the other hand, it was another week of recovery in the Industrial Goods sector, fueled by interest in BUACEMNT; the sector rose 3.07% w/w, on the back of an 8.67% w/w gain in the counter. Finally, the Oil and Gas space recorded tepid gains, rising 0.20% w/w.

Fixed Income: The fixed income market traded on a mixed note this week. Bearish sentiments dominated the bond and OMO segments, pushing average yields up 31bps w/w and 1bp w/w, respectively.  The NTB segment was relatively quiet as the NTB auction took center stage, but mild buy-side activity pushed the average yield down 1bp w/w.

Currency: The Naira depreciated 70bps w/w at the I&E FX Window to ₦437.03.

What will shape markets in the coming week?

Equity market: The ASI’s YTD return dipped by 1.63% this month, as the market declined further in comparison with the 1.06% loss in August. While we anticipate a cautious trading tone in the market next week, we are likely to see demand in some of the bellwether stocks given their current prices.

Fixed Income:  To open the week, we expect increased activity in the bond market due to anticipated FAAC credit, while the NTB market should trade on a bearish note as investors continue to trade post auction sentiments.

Inflation remains high despite signs of relief

In the month of August, inflation sustained its uptick in 6 of the top 10 economies in Africa. With inflation falling in Ethiopia, the country joined Angola on its disinflationary trend. Ghana became the inflation hotbed of Africa (excluding Sudan and Zimbabwe). Across our coverage economies, we observed a broad-based slowdown in month-on-month inflation, which can be linked to the decline in crude oil prices.

Inflation continues to hit the rooftop in Ghana

Headline inflation edged 216bps higher to 33.9% y/y in August. Both food and core inflation rose to elevated levels of 34.4% y/y and 33.6% y/y, respectively. Inflation in Ghana remains largely influenced by the sustained depreciation of the Ghanaian Cedi (-71.4% YTD) as imported food inflation rose to 35.2% y/y while the prices of locally produced food items were higher by 33.4% y/y. While the persistent surge in inflation keeps the real rate of return in the negative territory, the Bank of Ghana’s 750bps rate hike year-to-date has been inadequate in quelling external pressures. As the country engages the IMF for a $3 billion credit facility program, the Bank of Ghana’s rate decision has been postponed to the month of October.

Disinflation provides room for monetary easing in Angola

Angola sustained its disinflationary trajectory, easing to a 28-month low of 19.8% y/y in August 2022 (Jul’22: 21.4% y/y). Food inflation moderated to 19.4% y/y (Jul’22: 22.2% y/y). Amid sustained disinflation, the National Bank of Angola reduced its interest rate by 50 basis points to 19.5%. Although inflation is expected to remain subdued, a sustained decline in oil prices could chip off some of the currency gains made this year.

Kenya’s inflation rises to 8.5%

Inflation rose by 20bps to 8.5% y/y in August. The rise in inflation was mainly due to commodities under food and non-alcoholic beverages (15.3% y/y), transport (7.6% y/y), and housing, water, electricity, gas, and other fuels (5.6% y/y). Although month-on-month inflation is on the decline, we expect the removal of fuel subsidies to push inflation higher in September.

Inflation decelerates in South Africa

In South Africa, headline inflation declined for the first time since the Russian invasion of Ukraine. Inflation fell by 20bps to 7.6% y/y (Jul’22: 7.8%). The main drivers of inflation are food, housing and utilities, transport, and miscellaneous goods & services. Despite the slight dip in inflation, the South African Reserve Bank (SARB) raised its policy rate by 75bps to 6.25%. We expect the descent in oil prices to support subdued month-on-month inflation in the near term.

CBN remains hawkish as inflation inches further 

In Nigeria, headline inflation surged to 20.52% y/y (July’22: 19.6%). Despite the ascent in y/y inflation, we observed a slowdown in m/m inflation, denoting lesser incidents of fuel scarcity and the onset of the harvest season. In response to the uptick, the apex bank raised both the Monetary Policy Rate (MPR) and Cash Re-serve Ratio (CRR) by 150bps and 500bps, respectively to 15.5% and 32.5%. The twin-rate action came on the back of strong money supply growth and the need to reduce the negative real rate of return, especially as electoral campaigns officially begin in the country.