The increase in Nigerian inflation in September, to 13.7% y/y, will probably be followed by similarly high inflation readings in the coming months. The central bank is likely to keep its benchmark rate on hold at November’s MPC meeting, but deliver further rate cuts in early 2021 to prop up the economy.
Rise in inflation to push next rate cut into 2021
- The increase in Nigerian inflation in September, to 13.7% y/y, will probably be followed by similarly high inflation readings in the coming months. The central bank is likely to keep its benchmark rate on hold at November’s MPC meeting, but deliver further rate cuts in early 2021 to prop up the economy.
- Figures released today showed that inflation in Nigeria rose from 13.2% y/y in August to 13.7% y/y in September, the highest reading since early 2018. (See Chart 1.) The outturn was well above the Bloomberg consensus of 13.3% y/y, but in line with our forecast.
- The rise in price pressures was broad-based across categories. The two-stage devaluation of the naira, in March and July, probably pushed up inflation. Imported food inflation remained high and domestic food price pressures picked up, most probably due to floods causing disruption in the food supply chain. Food inflation, overall, jumped from 16.0% y/y in August to 16.6% y/y in September. (See Table 1.)
- Inflation edged up in other major price categories too including housing and transport, to 10.4% y/y and 11.6% y/y, respectively. The government’s moves to liberalise fuel prices seem to have added to petrol inflation, which feeds into the transport category. Meanwhile, core inflation edged up from 10.5% y/y in August to 10.6% y/y in September.
- Looking ahead, the headline inflation rate will probably stay elevated in the coming months. An electricity tariff hike that was scheduled to take effect in September was delayed into October. Food price pressures are likely to remain high. And it will probably take a while for the effect of a weaker currency to unwind.
- September’s rise in inflation probably means that the central bank is unlikely to follow up last month’s surprise interest rate cut with further easing at the next MPC meeting November. But if we’re right that price pressures will ease in 2021, the central bank is likely to step up its support for the struggling economy and we expect that the policy rate will lowered by 150bp to 10.00% by the end of next year.
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