Culled—Proshare
April 3, 2018/Vetiva Research
One eye on Fed activity, but little change there
Inflation declines, but not in the way imagined
Despite the steep fall in headline inflation (from 15.4% y/y in December 2017 to 14.3% y/y in February 2018), underlying inflationary trends are more sticky. Month-on-month headline inflation has remained marooned within the 0.75%-0.80% range for the last six months while underlying annual inflation (stripping out volatile food and energy prices) has fluctuated within a 45bps range in the last eight months – both of which are peculiar for a country with historically volatile inflation. In some ways, this is not so surprising as the main drivers of moderating inflation have been base effects and softening food prices. Moreover, these look to be respectable inflation levels compared to the last two years. Nevertheless, the broader picture warns that we are not out of the inflation woods and we are yet to see a marked change in underlying inflation. February numbers showed stronger signs of moderation – largest drop in core inflation since June 2017 but the medium-term trend cautions against overly aggressive easing.
Political and structural constraints should not deter committee
The MPC decision is clouded by two factors. The first consideration is of higher inflation at year-end given the likelihood of a minimum wage hike, increased election spending, and waning base effects. This outlook may impose a time constraint on monetary easing as the MPC may need to re-pivot to tackle runaway inflation. The second consideration is the continued doubt over the efficacy of monetary policy transmission in the Nigerian economy. The latter issue should be helped by a shift in federal government debt policy towards external borrowing (to reduce crowding out) and improvement in Nigeria’s credit risk environment (through the push for credit bureaus and collateral registries). All things considered, the recommended decision at this week’s meeting is a “HOLD” with further clarity to be provided on medium-term monetary policy.
Verdict: Hold
Author
Michael Famoroti of Vetiva Capital Management Limited can be reached vide m.famoroti@vetiva.com
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