Inflation to fall further, increase calls for rate cut
The lower than expected increase in consumer prices recorded in the month of June has been projected to cause more decline in inflation level, reduce cost of borrowing by government and raise further call for interest rate cut.
The inflation data due next week is now forecast to record a 10.94 per cent year-on-year fall in June 2018, from 11.61 per cent recorded in May, according to the research from FSDH Merchant Bank Limited.Though the development is showing a persistent recovery in purchasing power, it is not a true reflection of all individual prices, particularly the food items.
However, the expected drop in the inflation rate may lead to a further decline in the yields on the Nigerian Treasury Bills (NTBs), that is, a reduction in government’s cost of raising fund.“The prices of most of the food items that FSDH Research monitored in June 2018, increased, leading to a 1.1 per cent increase in our Food and Non-Alcoholic Index. This Index increased year-on-year by 12.43 per cent, up from 245.10 points recorded in June 2017
“We also observed an increase in the prices of transport and housing, water, electricity, gas and other fuels divisions between May and June 2018,” the Head of Research at the bank, Ayodele Akinwunmi, said.Recently, Akinwunmi, alongside other analysts, raised concern over the lingering herdsmen crisis that has swept across middle belt area, warning that the continued attacks on farmlands and the agrarian community may crystalise to food inflation.
Noting that effect may not be in the immediate, he said that when harvest period fully takes off in September, there may be a reversal of inflation numbers, coupled with the implementation of the budget.He however, cited the Food Price Index (FPI) that the Food and Agriculture Organisation (FAO) published for the month of June 2018, which dropped by 1.3 per cent from the level recorded in May, noting that the decline recorded was the first month-on-month decline this year.
The general decline in the international food prices coupled with the appreciation in the value of the Naira reduced the prices of imported consumer goods in Nigeria between the two months under review.But the bank has also noted that yields on government’s bonds may increase from the current levels, as it begins the implementation of the 2018 budget and the yields in the international market increase too.“We also note that the yields on the FGN Eurobonds have been increasing because of the tightening of global liquidity, from the monetary policy actions of major economies.”Thus, investors may strategically position for some of the Eurobonds to take advantage of attractive yields,” he said.
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