August Inflation Rate Jumps to 13.22% as Analysts see MPC hold Policy Rate @ 12.50%

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In line with our expectations, the National Bureau of Statistics (NBS) reported a 13.22% rise in annual inflation rate for the month of August (the highest since March 2018) from 12.82%
printed in July.

Further breakdown showed that
annual food inflation jumped to 16.00% in
August from 15.48% it printed in July. The
increase in food inflation rate was chiefly due to the sustained pressure on the food basket amid flood cases in food producing areas of the country.

Also, core inflation rate climbed to
10.52% (from 10.10% in July) given the rise in transport, electricity and clothing costs.

Similarly, imported food index rose to 16.42% (higher than 16.35% in July) amid depreciation of the Naira against the USD.

Specifically, two months moving average foreign exchange rates in the Interbank, BDC and Parallel market rose y-o-y by 3.06%, 2.87% and 2.54% to N378.86/USD, N465.22/USD and N471.50/USD respectively in August 2020. On a monthly basis, headline inflation rose to 1.34% in August (from 1.25% in July).

Notably, monthly food inflation rose to 1.67% in August (from 1.52% in July) as prices of bread, cereals, potatoes, yam and meats, amongst others, increased. Core inflation rose to 1.05% (from 0.75% in July) amid higher clothing and foot wear (+0.95%), transportation costs (+1.12%) and housing and energy (+0.76%).

Meanwhile, urban and rural inflation rates rose to 13.83% and 12.65% (higher than 13.40% and 12.28%) respectively.

In another development, the Monetary Policy Committee (MPC) would be concluding its 275th meeting on Tuesday, September 22, 2020 as it decides on the direction of the Monetary Policy Rate which was reduced by 100bps to 12.50% in May 2020 and kept it at that level in July 2020.

Other parameters such as Cash Reserve Ratio (CRR), Liquidity Ratio and Asymmetric band were also retained at 27.50%, 30% and +200 bps and – 500 bps around MPR respectively.

The Committee’s decision to hold rate in July 2020 was amid its efforts, in collaboration with the fiscal authority, to stimulate economic growth.

On the foreign scene, the Federal Reserve left the target range for its benchmark rate unchanged at 0-0.25% on Wednesday, September 16, 2020 and signaled to hold that range through at least 2023 to help the US economy recover from COVID-19 pandemic.

Meanwhile, WTI crude price jumped week-on-week (w-o-w) by 9.84% to USD40.97 a barrel amid a 5.55% w-o-w increase in US crude oil input to refineries to 13.48 mb/d as at September 11, 2020 (albeit, it fell by 19.27% from 16.71 mb/d printed in September 13, 2019).

Also, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell w-o-w by 0.88% to 496.05 million barrels (but rose by 18.92% from 417.13 million barrels as at September 13, 2019).

Similarly, Brent price spiked by 8.41% to USD43.43 a barrel while Bonny Light gained 8.20% to USD42.48 a barrel as at Thursday, September 17, 2020.

Amid the implementation of the new service-reflective electricity tariff, coupled with the full deregulation of the downstream sector, we expect inflation to further increase in September 2020 and in preparation of the oncoming festive season.

The rising cost-push inflation in the country, despite the economy runing below potential (especially now, due to COVID-19), dictates that Nigeria needs to do more to boost productivity while also releasing the chokehold of insecurity across the country.

Meanwhile, we do not see the MPC jack up the policy rate in the new week given that a reversal in its expansionary policy may further hamper demand-driven growth – which is already in negative territory at minus 6.10%.

Hence, we expect the Monetary Committee to hold MPR at 12.50% in order to further consolidate on its several measures put in place to lift Nigeria out of the anticipated recession in Q3 2020 and to restore the country’s output growth to the pre-COVID-19 levels.

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