Nigeria’s inflation will surge to 18.19% in Q2 – Cordros Capital

Analysts at Cordros Capital Limited have said the inflation rate in Nigeria will reach 18.19 percent at the end of the second quarter of this year.

The country’s inflation rose to 15.75 percent in December from 14.89 percent in November, marking the 16th straight month of increases, according to the National Bureau of Statistics.

Cordros Capital, in a note on Wednesday, said the Monetary Policy Committee’s decision to keep all the policy parameters unchanged at its first meeting was in line with “our expectation with no material changes to the committee’s November narrative.”

It said like in the November meeting, the committee highlighted the need to adopt an accommodative monetary policy stance to support economic recovery.

The analysts said, “We still expect a marginal decline in economic activities in Q1 2021 with the low base from Q2 2020 translating to improved growth in Q2 2021 – a U-shaped recovery.  

“On inflation, the pressure on domestic prices will persist over the medium term and reach a peak of 18.19 percent y/y at the end of Q2 2021. Consequently, we expect inflation to moderate at the beginning of Q3 2021, predominantly on the high base from the corresponding period of 2020.”
 
Cordros Capital said the “committee’s continued lack of clear-cut guidance” on the large spread between the parallel market and NAFEX exchange rates would continue to dampen activities in the manufacturing sector.

“With foreign investors on the side-lines and the impact of the diaspora remittances policy on dollar inflows likely to be limited, we expect the imbalance in the external sector to persist amidst a sustained increase in the demand for foreign exchange,” it added.
 
The analysts noted that in recent weeks, bond investors had exhibited aversion for long-duration bonds, saying the development had made short-term bonds defensive amid robust system liquidity.

They said this had culminated in the steepening of the naira yield curve, as investors had demanded higher yields to improve inflation-adjusted returns amid expectations of increased supply from the Debt Management Office.

“With the decision of the committee aligning with market expectations and the somewhat dovish tone struck by the CBN Governor, we expect risk appetite for mid- to long-dated bonds to improve marginally, putting the brakes on further steepening in the yield curve,” the analysts added.
 
Cordros Capital said it observed, prior to the MPC meeting, that the upward repricing of yields on long-dated bonds triggered a reduced appetite for equities among domestic institutional investors. 

It said, “With the MPC maintaining the “lower-for-longer” theme for rates, we expect a positive reaction in the equities market. Accordingly, we expect risk-averse investors to recalibrate their portfolio towards fundamentally sound stocks with attractive dividend yields.

“With the eagerly anticipated MPC meeting out of the way, we now expect investors’ attention to be focused on bond auction results as they seek clues on the direction of yields in the fixed income market.”