Inflation slides to 11.08%, analysts expect N10trn to hit financial market

Inflation slides to 11.08%, analysts expect N10trn to hit financial market

The nation’s headline inflation rate dropped to 11.08% in July, 2019. This happens to be the lowest since February 2016.

Nigerian Bureau of Statistics in the recent data release revealed that inflation moderates by 14 basis points (bps) to 11.08% in July 2019 compared to 11.22% in June 2019.

Meanwhile, FSDH Research has noted that it expects increased volatility in the inter-bank rates and a gradual increase in the rates at the Open Market Operations (OMOs) from August through to December 2019.

Inflation slides to 11.08%, analysts expect N10trn to hit financial market

It reckoned that huge maturities in excess of N9.62 trillion of government securities are expected to hit the Nigerian financial market during the period.

Analysts at the firm had predicted that July 2019 inflation would drop to 11.01% as against 11.22% recorded in June 2019, thanks largely to the harvest season.

The firm stated that increase in the inflation rate is not entirely bad, as a reasonable increase in general prices is important to encourage production.

“No manufacturer will be encouraged to produce in an environment when the prices of the goods that are produced are going down. What most countries and central banks are guarding against is an excessive increase in general prices”, FSDH added.

Consumers Price Index, the food sub-index increased by 13.39% in July 2019 from 13.56% in June 2019 while it rose by 1.26% in July 2019 from 1.36% in June 2019.

In a similar trend, the core sub-index rose by 8.80% in July 2019 from 8.84% in June 2019 while month on month, it grew by 0.77% from 0.85% in June 2019.

Therefore, average inflation for the twelve months ended July 2019 stood at 11.29%.

The Food sub-index print year low at 13.39% in July 2019, slower than 13.56% recorded in June 2019, on the back of lower price increase in local food items amid the harvest season.

On the other hand, imported food prices rose faster by 16.39% in July 2019 from 15.75% in June 2019, and month on month by 1.26% in July 2019 from 1.25% in June 2019.

Data from the Food and Agricultural Organisation (FAO) of the United Nations suggest that international food prices increased by 2.3% year on year in July 2019 and MoM, declined by 1.1% from June 2019.

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WSTC Securities Limited said, “We do not discount the impact of the recent increase in exchange rate by N20 to N326 for the payment of import duty to the Nigeria Customs Service at the ports, to have impacted the import food prices during the period”.

Furthermore, while the Food Sub-Index has primarily informed the headline inflation, Core inflation at 8.80%, lowest since February 2016, also contributed to the decline in Headline inflation.

“We expect lower inflationary readings in the incoming months in view of the harvest season. However, we believe that the recent presidential directive on foreign exchange restriction on imported food poses a downside risk to inflation”, WSTC stated.

The highest price increases were recorded in bread & cereals; fish; meat; potatoes, yam and other tubers; and oil and fats.

The highest price increases were recorded in cleaning, repair, and hire of clothing; domestic and household services; major household appliances; medical and hospital services; and repair of household appliance.

The inflation rate target of the Central Bank of Nigeria (CBN) is between 6% and 9%. As noted in our previous inflation reports, it is unlikely that Nigeria will achieve a single-digit rate of inflation in the short-term.

Despite the expected decrease in the inflation rate in the next few months, FSDH Research expects increased volatility in the inter-bank rates and a gradual increase in the rates at the Open Market Operations (OMOs) from August through to December 2019.

It stated that this is due to huge maturities in excess of N9.62 trillion of government securities which we expect to hit the Nigerian financial market during the period. Ordinarily, the expected large inflow of funds into the financial system may lead to inflationary pressure.

“In this situation, the way to manage the expected high liquidity is for the CBN to increase its ‘mopping-up’ activities in the inter-bank market, leading to an increase in the OMO rate.

“Therefore, we conclude that the next few months will throw up some interesting financing and investment opportunities in the Nigerian financial market”, FSDH stated.

Inflation slides to 11.08%, analysts expect N10trn to hit financial market