Nigeria inflation accelerates in October however we could be at a turning point

The Nigeria National Bureau of Statistics released inflation data for the month of October 2016 toady. The data shows that inflation accelerated to 18.3%y/y in October 2016, up from 17.9%y/y in September and 17.6% in August. The inflation rate was 9.3%y/y in October 2015. This means that the real inflation rate is -4.3%, which makes it more difficult to attract foreign currency flows. On a monthly basis, inflation rose by 0.8%m/m, which was the same as the previous month.

The main factor pushing inflation higher was the weaker exchange rate. Consequently, the inflation rate for electricity, gas & other fuels, imported food, education as well as transport were all noticeably higher. The lowest inflation rates were, once-again, for communication, which rose by a modest 5.7%y/y, as well as restaurant & hotels, which was up 9.4%y/y.

At this rate it is possible that inflation could peak in November 2016 at around 18.7%, instead of our previous estimate of January 2017. However, inflation is still likely to remain in double digits until mid-2017. The main risk to this outlook is the continued currency weakness.

Despite the de-valuation on the Naira there are still acute liquidity shortages in the currency market. This has manifested in the parallel exchange rate moving towards 460 Naira to the Dollar (NGN/$), much higher than the official exchange rate of 315 NGN/$. Unless oil prices and oil production improve meaningfully, there is the risk that the currency will be further devalued. In the meantime, the Central Bank of Nigeria could keep rates on hold, arguing that base effects will allow inflation to come back below the current interest rate of 14% in 2017, especially considering that the country is recession.

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