ABUJA (Sundiata Post) – Inflation in Africa’s largest economy is projecting a steep rise in YoY April inflation to 13.2%, 0.4% higher than that of March (12.8%). This will be the fourth consecutive monthly increase in 2016. If our forecast is accurate, it will be head-turning for the MPC which have barely recovered from the spike in March.
The lingering fuel scarcity was debilitating to economic activity and pressurised consumer prices in April. Additionally, rising transport costs and seasonality are also driving increase in costs of food staples and perishables.
Following the 100 basic points hike in Monetary Policy Rate (MPR) at the last Monetary Policy Committee (MPC) meeting, the CBN is under pressure to increase policy rates again. With real returns back in negative territory, the CBN will have to deliberate on the efficacy of using interest rates to contain the current inflationary trend. The absence of a foreign exchange policy, which still continues to be a major factor leading to uncertainty, has to be addressed at the MPC.
The FDC Lagos urban inflation index increased by 0.3%, from 10.96% to 11.26%. This was driven by the significant increase of 2.89% in the food basket despite a reduction of 1.17% in the non-food basket. The year-on-year (YoY) food index increased to 15.33% from 12.44%, while the YoY non-food index decreased to 9.04%, from 10.21% in March. Seasonality is affecting food supply.
Treasury bill rates have been on the increase as investors factor both the rising inflation rate and the benchmark interest rates. We expect the upcoming MPC meeting to have a bearing on the direction of T-bill rates. Meanwhile, liquidity positions are expected to remain at current levels pending significant inflows, and we therefore anticipate interbank interest rates to trade within the band of 3% to 5% per annum.
The stock market has lost 12.50% YTD partly due to interest rates, forex uncertainty and Moody’s downgrade. With fixed income being the preferred investment option given current macroeconomic conditions, the equity market is starved off system liquidity.