March 14, 2018/Cordros Update
- Nigeria’s inflation rate extended the deceleration it started in 2017 to the thirteenth consecutive month.
- Headline inflation was 14.33% y/y (0.79% m/m) in February, moderating from 15.13% y/y (0.80% m/m) in January.
- The reported decline is not unconnected with the high base of February 2017, considering particularly the fact that, the fuel scarcity imbroglio in the Federal Capital Territory (FCT) and some northern states, though relatively improved, is still some steps away from what could be regarded as resolved.
- The senate has approved the commencement of the screening for confirmation of candidates nominated by President Buhari as deputy governors of the Central Bank of Nigeria, members of the board of the bank, and members of the Monetary Policy Committee (MPC).
- That development suggests (albeit with minimal weighting) the possibility of the MPC convening its first meeting of the year next week (March 19 and 20).
- Our view is that the Monetary Policy Committee (MPC) will further hold the line on its policy stance, as the current inflation rate (at 14.33%) remains at a growth inhibiting level.
- We think a rate cut by the MPC earlier than in May is a tall order. Specifically, we look for a more compelling case for monetary easing in the July meeting, wherein we estimate the headline inflation rate to have dropped at least 200 bps below the current MPR of 14%.
- Put together, the continued drop in inflation rate and reduced supply of debt instruments will continue to drive fixed income yields southward, both in the primary and secondary markets.
- That said, we understand the monetary authority is still largely mindful of foreign portfolio investors, hence the likelihood of continued OMO auction by the CBN to keep yields at relatively attractive levels that support healthy portfolio flows.
- While we do not foresee a direct impact (Q4-17 earnings releases will shape appetite) of the latest data on activities in the equities market, we are not quick to rule out the possible reversal of flows into risky assets, from fixed income holdings, as return-hungry investors are enticed by lofty gains in the equities space.
- Equally likely is the long-term impact of improved inflationary conditions and declining interest rates on corporate performance by way of lower operating and financing costs and higher aggregate demand.
- Following the higher-than-expected moderation in February inflation, we revisit our model and revise our 2018 average inflation projection lower by 68 bps to 12.47%, from 13.15%.
- We estimate the headline inflation rate to increase at a slower pace of 13.52% y/y (1.0% m/m) in March, supported by the relatively high base of the corresponding period of 2017.