The slight rise in Nigerian inflation in March, to 12.3% y/y, is unlikely to prevent policymakers from cutting their key rate in May to ease the country’s economic pain caused by the coronavirus.
Rate cut on the horizon despite rise in inflation
- The slight rise in Nigerian inflation in March, to 12.3% y/y, is unlikely to prevent policymakers from cutting their key rate in May to ease the country’s economic pain caused by the coronavirus.
- Figures released today showed that inflation in Nigeria ticked up from 12.2% y/y in February to 12.3% y/y in March. The outturn was a touch lower than our forecast of 12.5% y/y, and above the consensus collected by Bloomberg (12.2% y/y).
- The breakdown of the data showed that rise in inflation was broad-based. Core inflation picked up from 9.4% y/y to a 13-month high of 9.7% y/y. And food price inflation continued to rise (to 14.9% y/y), suggesting that border closures – put in place last year to prevent rice smuggling – have pushed up food prices. Inflation also edged up in other categories, including housing and transport. (See Table 1.)
- We have some concerns about whether the inflation readings accurately reflect price movements on the ground. The headline rate has been eerily stable through a series of shocks including last year’s land border closure. But for what it’s worth, the broad-based rise in inflation across price categories suggests that the devaluation of the official and the Nafex exchange rates in late-March added to price pressures.
- Looking ahead, we think that the headline rate will increase further as food inflation continues to rise with the country’s lockdown imposed at the end of March putting pressure on prices, and imported goods become more expensive due to the weaker currency.
- Policymakers held off from monetary easing at their last meeting in March citing inflationary concerns, even as the coronavirus battered the economy. We think that will become untenable as economic conditions worsen. Above-target inflation has not prevented policymakers from loosening before. The benchmark rate will probably be cut by 50bp, to 13.00%, at the next MPC meeting in May. (See Chart 1.)
Chart 1: Consumer Prices & Key Policy Rate
Sources: Nigerian Bureau of Statistics, Central Bank of Nigeria, Capital Economics
Table 1: Nigeria Consumer Prices
Sources: Nigerian Bureau of Statistics. (*) Includes non-alcoholic beverages
Virág Fórizs, Africa Economist, firstname.lastname@example.org