May 2018 Inflation Update – The Bottom is Near

June 14, 2018/InvestmentOne Report

Yesterday, the Nigerian Bureau of Statistics released the Inflation Report for May 2018, which showed a further moderation in headline inflation to 11.61% year-on-year (y/y), slightly higher than our forecast (11.36%) and below the FG benchmark target rate of 12.42% in the 2018 Budget of Consolidation.
We highlight that the reduction in headline inflation was mainly on the back of high base effect of H1 2017. This was more prominent on the Food Sub-Index (down 135bps to 3.45% y/y in May 2018), which has seen support from Federal Government (FG) incentives to grow the Agricultural sector and stability in the Foreign Exchange (FX) markets.
However, imported food inflation remains sticky at 16.06% y/y, despite a stable foreign exchange rate. However, we have to highlight the global rising costs of inputs such as sorghum (+50.8% YTD), maize (+8.9% YTD) and cocoa (+26.9% YTD), which could have fed into the increased imported inflation m/m numbers, which came in at 1.22% m/m in May 2018, from 1.16% in April 2018.
However, contrary to the decreases recorded in the y/y numbers, we highlight the apparent increase in inflationary pressures as the Core sub index surged to 0.98% m/m in May 2018 vs 0.87% m/m in April in 2018 coupled with the change in the m/m increase in Food prices (1.33% m/m in May 2018, the highest m/m increase recorded since June 2017) was not as supportive of the slow increase in consumer prices in May 2018.
In our view, the moderation in the increase of consumer prices may be a positive for consumer sentiment, corporate performances and economic activities.
It could also increase the scope for the Monetary Policy Committee to cut its benchmark interest rate from 14% at the meeting next month (23rd – 24th July 2018).
However, we highlight that if the CBN do not cut rates at the next meeting, chances of cutting rates grow slimmer towards the end of the year, as we saw the US Fed hike rates yesterday and also signal two more 2018 Set against this backdrop, the MPC would have little to leverage upon in cutting rates after July 2018.
The bullish sentiment in the secondary fixed income market and the apparent improvement in system liquidity (as both the OBB and Overnight rates remain heavily subdued) contributed to the yield on the one year Treasury bill moderating and showing signs of stability at 13% levels in recent auctions, from 14%-15% levels at the start of the year.
The CBN released the Q3 2018 calendar for NTB issuance which shows planned government borrowings at NGN1.1trillion set against maturities of the same amount with no redemptions. In simple terms, the FG borrowing is simply rolling over what is maturing which implies that on a net basis no fresh borrowings.
We maintain our view that the rate of increase in consumer prices in 2018 is likely to slow on the back of the high base effect, which may be more pronounced in the Food sub-index.
As such, we could see a more moderate fall in headline inflation in June 2018, towards 10.91%. The blunt decline could be driven by the moderate increase in the CPI in June 2017 (+1.58% m/m).