INFLATION

By: Oluwaseyi Bangudu

(Lagos, Nigeria) After rising for the 15th consecutive month in January 2017, headline inflation is finally expected to reverse its upward trend with a marginal dip to 17.1 per cent this February, the Financial Derivatives Company, a diversified financial institution has said. It said this moderation in inflation is due to the waning of base year effects of 2016.

“In February last year, the Consumer Price Index (CPI) spiked by 4.18 points due to extraordinary events such as the crash of the naira in the forex market. It is anticipated that monthly inflation will slide to 0.9 per cent (11.7 per cent, annualized) mirroring the relative calmness in the domestic market between January and February 2017”, the firm said.

“Headline inflation is almost certainly set to decline for the first time in 16 months when the National Bureau of Statistics (NBS) releases the numbers next week. This forecast is based on a regression model and empirical analysis. Most anecdotal proxies also seem to suggest that the trend of a slowing pace in inflation is consistent with the outcome of our regression”, the firm said.

Though there was a slight appreciation in the Naira to the Dollar, as the Central Bank seems determined to intervene more aggressively in the forex market, domestic commodity retailers have as it were, shrugged off the currency appreciation by holding firm to their current prices, according to a commodities update report also by the financial institution.

The firm said that headline inflation spiked to 18.72 per cent in January as a result of an unexpected jump in food inflation and the impact of record high diesel price at N275 per litre. In January, the core and monthly indexes declined contrary to the direction of headline inflation.

“The fundamental reason for this decline is the impact of significant developments in February 2016 (base year effects). In February 2016, distortions in the forex market led to a significant jump in CPI, beginning a trend that lasted for several months. February 2017 has been relatively stable compared to last year; hence we expect a moderation in the increase in CPI from 4.18 in 2016 to 2.0 in 2017”.

“This means that a new trend of declining inflation is on the horizon. This new trend is observed amongst a number of Nigeria’s sub-Saharan African peers like Angola and Malawi. It is noteworthy that the anticipated decline in the February numbers does not mean that prices will decline” the report highlighted.

According to the report, there were no dramatic events in February to differentiate consumer price movements in the month from that of January. However, the end of February marked the beginning of what many believe is the path towards a more liberalized forex market.

The Central Bank announced far-reaching changes in the forex market with weekly disbursements of $1 million to Deposit Money Banks (DMBs) at a price of not more than 20 per cent mark up of the Inter-bank Foreign Exchange Market (IFEM) rate, according to the report. The Central Bank also sold a significant amount of dollars in the forwards market. The report highlighted that the actions of the Central Bank saw the naira appreciate by 15 per cent in the first seven days. This fueled hopes that the pressure on consumer prices from forex policy inconsistency and market scarcity is on its way to a decline.

A possible impact of this development, according to the firm, is that it is expected that the GDP numbers, which were recently published, and the inflation rate will be major considerations at the Monetary Policy Committee meeting which is to hold on March 20/21 to decide the course of monetary policy.

“The improvement in GDP numbers and anticipated slowing in the inflation rate are likely to sway the committee towards taking up its agenda to pursue a more accommodative stance with respect to interest rates” the firm said.


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