Freshly released inflation report by National Bureau of Statistics (NBS) showed that the eighth consecutive decline in headline inflation came to a halt, as inflation rate trended upward
to 15.63% in December (from 15.40% recorded
in November) – suggestive of a waning high-
base effect which had contributed to the
Faster inflation rates were also printed in both urban and rural areas at
16.17% (from 15.92%) and 15.11% (from
14.89%) respectively in December; driven
principally by food inflation.
As the sustained high-base effect waned, the food Index rose at a faster pace, by 17.37% in December (compared to 17.21% recorded in November) amid stronger y-o-y increases in prices of oils & fats, bread & cereals, fish, coffee, tea & cocoa, tubers, dairy and egg.
Also, core inflation rate rose to 13.87% (from 13.85% in November) on the back of higher y-o-y rise in prices of clothing & footwear, Housing water, electricity, gas & other utilities, as well as furnishings & household equipment maintenance.
Meanwhile, imported food index rose by 17.34% (as agaisnt 17.28% in November) as Naira further depreciated against the greenback at the interbank window.
Two months moving average foreign exchange rate at the interbank window rose m-o-m by 5.74% to N430.00/USD in December 2021. On a month-on-month basis, headline inflation declined in November to 1.82% (from 1.08%) on sustained sharp increase in prices of food items.
Hence, food inflation rate Jumped to 2.19% from 1.07%. On the positive side, core inflation rate fell to 1.12% from 1.26%. In another development, the Monetary Policy Authority would be having its first meeting of the year in the new week to further deliberate on the direction of the Monetary Policy Rate (MPR) and other key monetary variables.
The Committee’s vote, to hold rate, at the last meeting held in November 2021 was chiefly to support economic growth. The sustained expansionary stance chiefly led to the 4.03% GDP growth in Q3 2021.
At the last meeting, the policy makers put into consideration the continued recovery of the global economy in 2021 and its sustainability into the year 2022.
The IMF’s stance on advanced economies inflation rate which is expected to rise further, against its earlier stance of a transient inflationary pressure, as commodity prices recover.
The committee also put into consideration the proposed move by the US Federal Reserve Bank to commence policy normalisation.
Cowry Research notes that the positive impact of high-base effect on food inflation rate year on year has begun to wane, hence the rise in inflation rate in the last month of 2021.
More so, we saw inflationary pressures in the month of December, amid retail price increases which is usually associated with consumer spending in the yultide season, as expected.
Notably, on the premise of an upward inflationary pressure going forward amid the anticipation of subsidy removal, increasing electricity tariff, foreign exchange volatility and the intending three- times rate hike by Federal Reserve in 2022, the local Monetary Policy Committee (MPC) appears to be at a tight corner, pressured to increase benchmark rate this year.
Cowry Research notes that an increase in MPR would hamper economic growth, hence we do not expect MPC to raise rate in 2022.
Our expectation on retention of policy rate centers more on the fact that Nigeria’s inflationary pressure is chiefly cost-push, which would be aggravated if cost of funding goes higher again – especially for the manufacturers who would pass on additional cost to their customers.
We believe that the monetary policy maker would see pre-election aggravated demand- pull inflationary pressure as transient. Hence, we anticipate an upward trend in stop rates and yields on debt securities in order to retain investment in Naira denominated assets.