January 22, 2018/InvestmentOne Report
Please click to download our 2017 Inflation Review and 2018 Outlook
· 2017 saw the increase in consumer prices slow largely due to the benefit of the high base effect of 2016 and the harvest season. Consequently, headline inflation fell to 15.37% year-on-year (y/y) in December 2017, from 18.55% y/y in December 2016, averaging 16.55% y/y and 1.20% month-on-month (m/m).
· Going into 2018, we expect headline inflation to continue to moderate on the back of the high base effect of 2017 and the willingness of the administration to curtail any potential increases in energy and food prices, given the negative impact it may have on re-election prospects.
· As a result, we forecast the increase in consumer prices to slow to c.11.40% y/y at the end of 2018 while averaging c.12.45% y/y and c.0.90% m/m.
· Nonetheless, we highlight that the on-going scarcity of PMS, which contributed to the c.+18% m/m increase in the average PMS price paid by consumers in December 2017 (c.N172/litre), a continued slowdown in the Agriculture sector and election spending remain a downside risk to our outlook.
· With this said, as headline inflation falls to the CBN’s target of c.11-12%, we could see the Monetary Policy Committee shift to a more accommodative stance starting in H1 2018.
· Although we are likely to see CBN continue to drain system liquidity, by auctioning OMO bills, in defence of local currency, the expected slide in the MPR should be supportive of a further contraction in yields in the fixed income market while also positively impacting the equities market.
· However, the potential reduction in the Monetary Policy Rate (MPR), from 14% currently, may be moderated by expectation of further rate hikes by the US Federal Reserve and the gradual phasing out of the European Central Bank’s quantitative easing.