Portfolio Sensitivity to Interest Rate to Persist as Inflation Tapers
Fixed income instruments sensitivity to interest is expected to persist despite moderation in Nigeria’s headline inflation rate for the month of April, analysts indicate in a report. Against analysts’ consensus expectations, inflation retreated slightly, falling 5 basis points in the month of April according to new data from the National Bureau of Statistics (NBS).
In a report, CSL Stockbrokers limited considered the slide in average price level a promising beginning while the firm also hinted that risks abound.
Bucking the recent trend, the CPI data released yesterday afternoon by the Bureau of Statistics for April 2021 showed that inflation tapered by 5bps to 18.12%, supported by a decline in food (-23bps) inflation, which masked the acceleration in the core inflation (+7bps).
The moderation in inflation came as a surprise to us, as our forecast had earlier indicated that prices will remain high in the near term. On a month-on-month basis, headline inflation again surprisingly pared by 59bps to 0.99%.
Analysts at CSL Stockbrokers said despite the positive inflation surprise in April, they do not believe the country is out of the woods yet, as incessant security challenges in the food-producing regions will likely exacerbate food prices.
The firm said the Nigerian Electricity Regulation Commission (NERC) announced late last month that electricity tariffs will be increased once the extraordinary tariff review process for the country’s 11 electricity distribution companies are completed.
“If implemented, this is likely to increase core inflation by about 100-200bps. Overall, we expect month on month headline inflation of 1.16% in May, which translates to a year on year reading of 18.10%”.
Investment analysts are expecting duration apathy to persist at the fixed income market amidst the ongoing yield repricing.
“Despite the moderation in inflation, we expect sentiments to remain bearish in the fixed income market, as the negative real return, successive rate hikes at auctions and elevated fiscal deficit strengthen the case for sustained yield increases in the near term”, analysts stated.
In recent weeks, the yield curve appears steepened, indicating stronger economic activity and thus, higher interest rates.
“This makes us forecast a likely rate hike by the Central Bank at the May or July monetary policy meeting, as well as a more hawkish liquidity management policy, through cash reserve ratio debits to further reduce inflationary pressures”, CSL Stockbrokers said.
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Portfolio Sensitivity to Interest Rate to Persist as Inflation Tapers
