Another inflation report to disappoint
The latest inflation report from the NBS shows a third successive decline in the headline inflation y/y, to 17.2% in April from 17.3% the previous month. (Our expectation, shared with the wire services, was 17.2%.) The growth in the core measure slowed from 15.4% y/y to 14.8%, its lowest level for one year. In contrast, food price inflation accelerated from 18.4% y/y to 19.3%. The report overall is a disappointment for policymakers since it highlights still pronounced supply-side constraints.
We struggle to see much positive impact of the naira appreciation on the parallel market other than on imported food prices (see chart). The improvement in the supply of fx has not been replicated in power, for example.
One possible explanation for the stubbornly high food price inflation (of 2.0% m/m in April) is an increasing preference of farmers for exporting their produce. It is anecdotal, and not yet corroborated by any other data such as non-oil exports.
This latest inflation report, like the last, is unlikely to be a driver in the market for naira-denominated FGN securities.
The monetary policy committee (MPC) meets next week. In its communique in late March, it was adamant that it would not consider a policy rate cut without a clear trend of m/m declines in the headline rate. We doubt that the committee will be impressed with this latest inflation report, and do not see much joy in the months ahead. The policy rate may well be stuck at 14.00% throughout the year.
The run of positive base effects comes to an end this month (May), for which we see a marked decline in the headline rate to 15.8% y/y on a marginally lower m/m rate of 1.5%.