Inflation in Nigeria was registered at 1.25% m/m July 2016, lower than the June and May prints of 1.71% m/m and 2.75% m/m respectively. However on an annual basis inflation accelerated to 17.1% y/y, from 16.5% y/y in June and 15.6% y/y in May. This is the highest inflation print since October 2005. Increases were experienced across all items in the CPI basket.
Food inflation increases to 15.8% y/y from 15.3% y/y and 14.9% y/y in June and May respectively. Imported food inflation accelerated to 20.5% from 20.1% in June highlighting the effects of the weaker Naira against major currencies. Nigeria has just gone through its harvest season and this could cause downward pressure on the inflation rate. Core inflation rose to 16.9% y/y from 16.2% y/y pushed up by Energy prices at 25.6% y/y.
Inflation is now well out of the Central Bank of Nigeria’s target range of 6 – 9%. In response the bank increased rates by 200 basis points at their most recent meeting to 14%. Real Rates in Nigeria are currently -3.7% from -4.48% in June and have been in negative territory for 6 consecutive months. They have been as low as -9.6% in 2010. Inflation is expected to continue higher trajectory and remain so into the first quarter of 2017. It is likely to reach 20% by year-end. With the official domestic currency rate and the parallel market rate at record highs, inflation could spiral out of control. (Dangote Cement, Nigeria’s biggest cement producer, has already announced that it will increase cement prices further in the third quarter of 2016).
The Central Bank had switched its stance on monetary policy and decided to target inflation, instead of growth, in an effort to achieve positive real rates. This was in light of the bank removing the Nigerian Naira peg to the US Dollar and allowing the currency to float freely. This would mean that the bank would have to hike interest rates by more than 400 basis points as the year progresses. In this scenario the monetary policy rate would be moved to a historical high of more than 18%. However it is not such an easy decision as pushing rates up too aggressively could send the country deeper into recession.
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