The National Bureau of Statistics last week announced that inflation rate rose to 12.9 per cent in April, year-on-year, driven largely by non-food items, sending interest rates on bonds and interbank borrowing on an upswing. The figure compared with a 12.1 per cent increase in March, year on year.
The bureau in its review of the Nigerian Economy in 2011 and Economic Outlook for 2012 – 2015 also forecasted that inflation will rise to 13.57 per cent by the end of this year as against 10.91 per cent in 2011. This was corroborated by analysts who expect inflation to peak at 14.4 per cent in the third quarter before falling slightly.
“Inflation will probably peak at 14.4 per cent year on year in July to August,” said Standard Bank’s Samir Gadio, adding that “Inflation is set to drop in Q4, 2012 and reach high single-digit in early 2013, based on our forecasts.”
Food inflation, the largest component of the index, fell slightly to 11.2 per cent, compared with 11.8 per cent in March. The change in the overall index was largely because inflation in the month of April 2011 had been so subdued.
“The higher year-on-year change could be partly attributable to base effects as the index was relatively more stable in April of 2011 ... lower price levels in April 2011 will reflect higher year-on-year percentage changes in April of 2012,” the statistics bureau said.
Interest rates in the money market reacted to the rise in inflation with an upswing as indicated by the yields on bonds and treasury bills which rose across all maturities last Thursday following the news.
Bond and Treasury bill yields adjusted upwards, rising between 20 and 100 basis points, dealers said, after April inflation climbed to 12.9 per cent, year-on-year from 12.1 per cent in March.
Successive hikes in interest rates by the central bank had spurred a sustained rally in bonds, but Tuesday’s inflation data reversed some of those gains, traders said.
The shortest 3-year bond inched up to 15.4 per cent on higher inflation, from 15.1 per cent, while longer tenor 20-year paper was unchanged at 14.39 per cent.
Prior to the release of inflation, the 5-year bond was yielding 15.05 per cent, but had now gone up to 15.36 per cent, one dealer told Reuters, adding that next week’s rate decision was going to be key for bond yields.
In the interbank market, lending rates across all tenors rose save for the call and 7-day which remained flat at 15 and 15.33 per cent respectively.
The 30-day tenor rose to 15.7084 per cent from 15.6667 per cent the previous day, as against 15.175 per cent the previous week. The 60 and 90 days rose to 16.0417 and 16.3750 per cents from 15.9167 and 16.25 per cents respectively compared to 15.4667 and 15.7250 per cents the previous week.
The longer tenor 180 and 365 days also rose to 16.6667 and 17.0083 per cents respectively from 16.5833 and 17 per cents previously as against 16.0417 and 16.5 per cents respectively the previous week.
The naira on Wednesday fell to its lowest level in two months against the U.S dollar on the interbank market, on strong dollar demand.
At the interbank market the naira exchanged at N159 to the dollar compared to N157.5 the previous week, and N160 to the dollar at Bureau-de-change and parallel market compared to N158.7 and N158.5 per cents respectively as at the previous week.
“The currency will continue to be important for the overall inflation outlook, and in the very recent past we’ve seen what may possibly be temporary pressures on the back of the euro area crisis,” said Razia Khan, head of Africa research at Standard Chartered Bank.
Despite the rise in inflation and consequent rise in bonds and interbank rates, analysts do not foresee further an increase in the Monetary Policy Rate (MPR) as the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meet today and tomorrow.
CBN has held rates at 12 per cent since last October, and Governor Lamido Sanusi noted a “resurgence of inflationary pressures”, though he praised the Federal Government for its efforts to introduce fiscal discipline into its 2012 budget.
“Given that inflation remains in the range projected by the CBN, we do not expect rates to be changed from 12 per cent at the May MPC meeting,” said Alan Cameron, a London based economist for Nigerian stockbroker CSL.
“The CBN has said that it expects inflation to peak at 14 to15 per cent in Q3 2012. Inflation would need to move above this range in order for the CBN to reconsider its stance,” he said.
“The market and central bank are both anticipating a peak in inflation of around 14.5 per cent y-o-y in Q3. This mitigates the possibility of an unexpected hike in policy rates … or a significant sell-off in bonds,” Samir Gadio, emerging market strategist at Standard Bank, wrote in a note to clients.
“We are waiting to figure out what the central bank will do. Will they react to the trends in the rise in inflation? So far, investors have priced in a hold decision for rates,” he said.
Nigeria auctioned 35 billion naira worth of 5-year bonds maturing in 2017 on Wednesday at a yield of 15.24 per cent, compared with 15.1 per cent at its last auction in April.
Domestic pension funds, the largest buyers of Nigeria government debt, have switched from relatively poorly performing equities over the last year into fixed income.
Dividend yields for equities are around 8 per cent. Dealers say foreign investors have been attracted the country’s bond yields but worries over liquidity naira stability mean they have stuck with short term one-year treasury bills yielding around 14 per cent.