Energy Crisis Shifts Nigeria’s Interest Rate Cut Outlook -Analysts
The outlook for an interest rate cut in Nigeria has turned negative, as disinflation reversed amid the global energy crisis triggered by the U.S.-Iran war in the Middle East.
Nigeria’s macroeconomic indicators have been improving, though the local economy has seen little or no change amidst reforms.
Costs of living continue to increase sharply, while the standard of living has nosedived since FX, subsidy reform, and redistribution of wealth to the government, rather than the people.
Federally collected income has recorded a significant increase, and so has the naira value of external debt services due to exchange rate risks.
FX reform has stabilised the exchange rate, but the consumer price index remains elevated, with projections indicating an uptick in the second quarter.
Petrol pump prices have increased by about 100%, though wage earnings remain stable, and locals continue to contend with unemployment, with no latest statistics available at the moment.
The market has anticipated a slash in the monetary policy rate to boost lending into the private sector and enhance the economic growth trajectory.
With a benchmark interest rate at 26.5%, businesses are grappling with the costs of borrowing. The cost of doing business remains on the rise, and it is fuelling an increase in price surge by the oligarchy, as seen in the cement sector.
Rent, food prices and costs of mobility have become unbearable, and personal borrowing has become a nightmare for people struggling to survive the economic hardship.
Interest rate at 26.5% is anti- economic growth, some analysts said, noting that the private sector’s borrowing activities will be low, and banks will continue to invest in government borrowing instruments to survive Nigeria’s rising loan default rate.
In its latest report, the National Bureau of Statistics said headline Inflation rises to 15.38% y/y in March. This represents a 32 basis points (bps) increase from the 15.06% y/y recorded in February, effectively halting the consecutive eleven-month disinflationary trend.
On a month-on-month (m/m) basis, inflation rose significantly to 4.2%, more than double the 2.0% recorded in the preceding month. This sharp uptick underscores an inflationary momentum introduced by external factors.
In particular, heightened geopolitical tensions in the Middle East have led to an increase in global energy prices, which is now feeding through into domestic price levels and offsetting the earlier gains from monetary tightening.
The inflationary pressures were broad-based across key components of the index.
Food inflation rose significantly to 14.3% y/y, up from 12.1% y/y in February, representing a 220bps increase. This acceleration was primarily driven by seasonal supply constraints associated with the ongoing planting season.
On a monthly basis, food inflation declined marginally to 4.2% (vs 4.7% in February), reflecting reduced demand after the Ramadan festive season.
However, farm produce inflation increased to 4.6% m/m, up from 3.7% m/m in the prior month, reflecting supply-side constraints that were further compounded by elevated transportation and logistics costs, amplifying pass-through effects on staple food prices.
In addition, core inflation also rose, to 16.2% y/y from 15.9% y/y in February. This was largely driven by increased fuel costs, which continue to exert upward pressure on service-related activities.
On a monthly basis, core inflation rose to 4.0% m/m (vs. 0.9% m/m prior) and services inflation rose to 2.6% m/m (vs. 0.3% m/m prior), reflecting the continued adverse effect of higher fuel prices on the services sector.
Higher energy prices halt disinflationary trend and could sustain elevated inflation in the near term, CSL Stockbrokers Limited said in a note.
The investment firm said this supply-side pressure is likely to be further exacerbated by persistent logistics challenges, including elevated transportation costs and insecurity in key food-producing regions, which continue to disrupt farm-to-market distribution channels.
In addition, higher global energy prices remain a critical upside risk, as it raises the cost of imported food items and agricultural inputs such as fertilisers and agrochemicals.
Also, increased demand associated with Easter festive celebration could further influence upward pressure on food prices in the month of April.
Core inflation is similarly projected to remain elevated, underpinned by sustained increases in fuel prices and their broad-based pass-through effects on services and other non-food components of the consumer basket.
In addition, higher energy prices could persist in the near term due to the ongoing war in the Middle East between the US, Israel and Iran.
Consequently, due to the second-round effect of higher fuel prices, higher operating expenses are expected across all sectors, including transportation, hospitality, and healthcare, thereby feeding into higher final consumer prices. Energy Crisis Shifts Nigeria’s Interest Rate Cut Outlook -Analysts
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