Nigeria’s inflation to decelerate further on stable exchange rate, tight liquidity

Financial analysts say Nigeria inflation may decelerate further in August albeit marginally to 16 percent, citing stable exchange rate and tight liquidity as well as a reduction in inventory cycles by manufacturers as major influencers.

Analysts at Financial Derivatives Company (FDC) specifically forecasts headline inflation would decline slightly for the seventh consecutive month to 16.03 percent in August as base year effects wear out.

Month-on-month inflation is also expected to slide to 0.99 percent (12.55% annualized) from 1.21 percent (15.57% annualized) in July.

“We believe that this decline would support the sense of cautious optimism about the economy, invigorate policy maker enthusiasm and push up investor confidence in the markets,” they said in their FDC Economic Bulletin released Thursday, August 31, 2017.

They also expect core Inflation to continue its downward trend.

“We expect core inflation to marginally fall partly due to the stable exchange rate and the reduction in inventory cycles by manufacturers to reduce carrying costs. Manufacturers and retailers are already stocking up for a hectic December Christmas season,” they said.

Their outlook for the period going into December indicates that demand-pull effect on inflation would be minimal due to tight liquidity.

See also: Nigeria’s manufacturing index expansion slows in August as economy comes out of recession

They specifically noted the average opening position of the interbank market in August, which was N106.33 billion short in response to massive interventions and OMO auctions by the Central Bank of Nigeria (CBN), resulting in a contraction in money supply and higher interest rates especially at the short end of the curve.

They noted that a positive correlation exists between money supply and inflation, saying “the illiquidity in the market serves to corroborate the anticipated decline in the pace of inflation,”

However, their outlook on the naira was cautious, noting that there is some skepticism about the ability of the government to support the current foreign exchange policy on the back of the cap on Nigeria’s crude oil output at 1.8mbpd, as well as speculations of Nigeria being included in the output cuts at the September 22nd meeting in Vienna.

They equally see the monetary policy committee (MPC) maintaining the status quo when they meet in late September MPC is scheduled to meet on September, a decision that might not be unanimous, adding that they believe the decision to maintain status quo is likely to have any impact on the general level of interest rates in the market. This is because the MPC decision has been factored into market expectations.