US, Nigeria Retain Policy Rates; Local October Annual Inflation Rate Drops to 11.26%…


United States Federal Reserve retained its interest rate range at 2.00% – 2.25% after its November 2018 meeting while also reaffirming its plans for an additional hike before the end of
the year, three increases in 2019 and one in 2020.

According to members of the FOMC, the
policy rate was retained due to sustained strong economic growth (3.5% growth rate in Q3 2018) and strengthened labour market – the number of employed persons increased to 156.56 million in
October from 155.96 million in September while unemployment rate was unchanged at 3.7% in October.

U.S Inflation rate also increased to 2.5% in October 2018 (from 2.3% in 2018) mainly driven by increases
in fuel and gasoline. On the local scene, the Central Bank of Nigeria Monetary Policy Committee (MPC), after its 2-day meeting on Thursday, November 22, 2018, voted to retain all policy rates – Monetary Policy Rate (MPR)
at 14% with the asymmetric corridor at +200 and -500 basis points around MPR, Cash Reserve Ratio (CRR) at 22.5% and Liquidity Ratio at 30% in line with our expectation.

The Committee projected that Nigeria’s real sector growth would expand by 1.75% in 2018 amid implementation of ERGP, enhanced credit to real sector, stability in FX rate and increased productivity in oil and non-oil sectors.

It however stated that the downside risks to economic growth would include low domestic credit to SMEs and weak aggregate demand. The MPC also raised
concern over the possibility of reversal in the moderated October 2018 inflation rate, given the expected higher
spending activities amid commencement of the election campigns as well as end of year festivities.

Meanwhile, recently released October inflation report showed that headline inflation rate reversed its uptrend, to 11.26% year-on-year (from 11.28% in September 2018). The surprised marginal decline in annual inflation rate was driven by lower food prices in urban areas – urban food inflation declined to 13.96% in October 2018 from 14.03% in
September 2018.

Hence, rise in food index slowed y-o-y to 13.28% (higher than 13.31% in September) despite the flood challenge experienced in the South-South in the month of September. Plateau (+ 11.36%), Oyo (+11.76%) and Akwa Ibom (+ 12.04%) recorded the slowest rise in food inflation while Beyelsa (+ 16.36%), Abuja (+ 15.85%) and Taraba (+ 15.27%) recorded the fastest increase in food prices.

However, core inflation rate rose on an annual basis to 9.88% (from 9.84% in September). This was partly caused by m-o-m increase in the costs of transport (0.68%), clothing & footwear (0.84%) and energy cost (0.48%).

Also, m-o-m change in price level for imported food was flattish at 1.22% despite higher foreign exchange rates at most of the FX market segments,
especially the interbank exchange rate which rose m-o-m by 0.62% to N362.15/USD in October.

The MPC’s decision to refrain from further tightening of monetary policy, which was in line with our expectation
as stated in our Cowry Weekly Financial Markets Review and Outlook dated November 15, 2018, is expected to
support the attainment of domestic economic growth projection of 1.75% – given that the growth rate slowed
to 1.50% in Q2 2018 from 1.95% in Q1 2018.

We believe inflationary threats from end of year spending activities
(from election campaigns and Christmas festivities) as well as expected FPI outflows (in response to expected
increases in US Fed rate) could be tamed using OMO.

Hence, we expect a status quo policy pronouncement when next the MPC meets in January 2019 – despite upside risk to inflation from expected increase in political spending as such risk should be short-lived.

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