March 14, 2018/InvestmentOne Report
Headline inflation slows for the thirteenth consecutive month to 14.33% in February 2018
Earlier today the Nigerian Bureau of Statics released its February 2018 Inflation report, which showed a further slowdown in the rise in consumer prices to 14.33% y/y, from 15.13% y/y in January 2018, while the month-on-month (m/m) increase in headline inflation was fairly flat at 0.80% in February 2018.
The moderation in headline in inflation y/y was much steeper than expected with Bloomberg consensus estimating 14.60%.
The Food sub-index fell its lowest level in 13 months at 17.59% y/y in February 2018, from 18.92% y/y in January 2018. The m/m reading in February showed just a marginal slide to 0.85% against 0.87% in January 2018.
While the rise in the Core sub-index slowed to 11.70% y/y in February 2018, from 12.10% y/y in January 2018, inflationary pressures appear more evident in the m/m reading of 0.75% in February 2018, a faster increase than the 0.68% reported in January 2018.
Outlook & Implications
In our view, the moderation in the increase in consumer prices may be a positive for consumer sentiment, corporate performances and economic activities.
This should further support the likelihood of a reduction in the benchmark interest rate from 14% currently.
While the cut in interest rate may not take place in March 2018, given that the Senate has yet to confirm the nominated Deputy Governors of the CBN and Monetary Policy Committee members, we foresee a 100basis point cut in the Monetary Policy Rate in H1 2018 where we forecast inflation to have fallen below 11% due to the favourable base effect of H1 2017.
This as well as the refinancing of local debt, with c.N480billion worth of Treasury bills to be redeemed by the end of Q2 2018, could see yields in the fixed income space decline.
Given the forecast for a further slide in inflation as well as interest rates, we could see investors (domestic and foreign) position for potential capital gains putting downward pressure on yields in the near term.
However, the decrease in yields in the fixed income space could be short lived as we foresee some level of foreign investor outflow in the later part of H2 2018, where we may see increased political risk and upward pressure on headline inflation as a result of election spending and the much discussed increase in the national minimum wage.
While the average price paid for PMS by consumers fell c.11% m/m to c.N173 per litre in February 2018, it was c.15% higher y/y. Consequently, the lingering scarcity of PMS remains a risk to our outlook for inflation.