Inflation to slow further in May as analysts’ position mixed on rate cut

Financial Derivatives Company (FDC), an economic think tank and financial advisor led by Bismark Rewane, has projected that headline inflation in Nigeria is expected to slow further in May by 68bps to 11.8 percent from 12.48 percent in April.

The forecast, if accurate, is expected to increase the possibility of a rate cut at the next MPC meeting in July, says FDC. It will also mark the 16th consecutive monthly decline and the lowest rate of inflation since February 2016.

However, another economic analyst opines that the possibility of a rate cut in Nigeria in the near term is far-fetched.

“The primary objective of Nigeria’s central bank is price stability and as long as the inflation rate is still in double digits, re-inflating the economy through a rate cut that will boost productive activities is still unlikely, in the near term especially as we approach the 2019 elections,” he told business a.m.

There are some other analysts who believe that the prolonged contractionary stance of the central bank is only effective in the short run and there is a possibility of inflation still creeping in, in the long run.

One analyst, who wishes not to be named, further explained that due to a shortage of production funds, scarcity of products in the market can lead to overpricing which in turn creates room for an increase in inflation.

Meanwhile, the FDC economic bulletin released late Friday noted that both the rate of inflation and slope of the curve have declined.

“This moderating trend in headline inflation (year-on-year) is mainly driven by base year effects. We expect food and core indices to move in tandem with headline inflation,” the report stated.

Conversely, month-on-month inflation is expected to rise to 1.28 percent (16.45% annualized) after recording a marginal decline of 0.83 percent (10.45% annualized) in April.

This projection, according to the FDC, is largely due to the spike in food prices, as a result of a number of factors, including the Moslem Ramadan fast, the commencement of the planting season and the herdsmen attacks in some northern parts of the country.

It noted that, “the sharp increase in month-on-month inflation could signal an inflection point in the headline inflation.”

Even though the policy rate has remained unchanged at 14 percent, the financial advisers said, effective Treasury bill rates have fallen sharply by 371 basis points this year.

“In spite of lower interest rates, credit to the private sector (CPS) has remained constrained. There is a growing level of risk aversion by the Nigerian banks. In April, CPS declined by 18bps to N22.25trn from N22.29trn in Dec’17,” it stated.

The CBN is of the opinion that cutting rates would boost liquidity, which could trigger inflationary pressures. “However, a reduction in interest rates will support increased lending to the private sector,” the FDC analysts argued

The availability of credit to the real sector will spur increased production and boost aggregate output. In the long run, the impact is lower prices and inflation.

In a review of some sub-Saharan African countries, FDC noted thus: “Most of the SSA countries under our review are yet to release their inflation figures for the month of May except Kenya and Uganda.

“Kenya’s inflation rate increased to 3.95 percent while Uganda slowed to 1.7percent. The other African countries, which are yet to release their inflation numbers for the month of May, recorded a decline in their April inflation numbers except for South Africa.

“The latter recently released its Q1 GDP numbers which were a contraction of 2.2 percent.

Furthermore, with the exception of Ghana, all the Sub-Saharan African (SSA) countries under review maintained status quo at their May meeting,” FDC explained.

Analysts are anticipating that the declining trend in inflation is slowly reaching an inflection point, as month-on-month inflation, which is a better indicator of economic reality, is anticipated to increase.

“This would be compounded by the impact of the Ramadan fast, planting season shortages and increased liquidity associated with the budget approval and implementation. Furthermore, the imminent presidential assent to the 2018 appropriation bill in June and the release of the authority to incur expenditure would exacerbate inflationary pressures, due to the corresponding increase in liquidity and forex demand.

“The new excise duty on alcoholic beverages and tobacco took effect on June 4th. Since alcoholic beverages and tobacco account for a minuscule proportion of the food basket, we do not expect any significant impact on inflation.

“This notwithstanding, there are other potential factors which could trigger inflationary pressure such as growth in money supply, however, this has been muted by the CBN’s continuous sale of securities, as broad money supply grew at an annualized rate of 2.17 percent in April,” they stated.