The slight increase in Nigerian inflation in May, to 12.4% y/y, will probably be followed by further rises over the coming months, but we still think that more interest rate cuts lie in store later this year.
Inflation rising slowly but surely
- The slight increase in Nigerian inflation in May, to 12.4% y/y, will probably be followed by further rises over the coming months, but we still think that more interest rate cuts lie in store later this year.
- Figures released today showed that inflation in Nigeria rose for a ninth consecutive month from 12.3% y/y in April to 12.4% y/y in May. The outturn was a touch lower than our forecast of 12.6% y/y.
- The breakdown of the data showed that price pressures picked up across the board. Core inflation rose from 10.0% y/y in April to a 22-month high of 10.1% y/y last month. And inflation also edged up in other major price categories, including housing and transport. (See Table 1.)
- We have some concerns about the inflation data capturing price movements on the ground. The food inflation reading, up by a hundredth of a percent from 15.03% y/y to 15.04% y/y gave an impression of eerie price stability during a time when lockdown restrictions were in place. Food inflation has generally risen in other parts of the world in recent months.
- What’s more, the headline rate has been remarkably stable in the aftermath of shocks including last year’s land border closure, albeit with a slight upwards trend. For what it’s worth, though, the broad-based rise in inflation across price categories suggests that the devaluation of the official and the Nafex exchange rates in late-March has added to price pressures.
- Looking ahead, we think that the headline rate will continue to edge higher over the next few months as a weaker naira puts further upward pressure on inflation of imported goods and coronavirus containment measures lead to higher food prices. But the headline rate should start dropping back in late-Q3.
- Despite inflation remaining well above the central bank’s 6-9% target range, policymakers cut their benchmark rate aggressively in May, from 13.50% to 12.50%, in an attempt to shore up an economy battered by the coronavirus crisis and low oil prices. Once inflation has passed its peak, we think that more monetary stimulus will be unleashed. We’ve pencilled in a 50bp cut in the policy rate, to 12.00%, in the September MPC meeting. (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