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Nigerian inflation – Inflation slows sharply…on the swing of base effects 

• Nigeria’s headline inflation extended its moderating trend for the fourteenth consecutive month. The March Inflation report showed annual CPI dropping to 13.34% in March from 14.33% a month before. The outturn was slightly better than the 13.5% expected (ARM estimate). The fall was, in a broad sense, due to base effect and slowdown in energy price inflation. More specifically, the weakness was concentrated in food and transport.

• Looking through the breakdowns, annual food inflation dipped 151bps to a nineteen-month low of 16.08%. Similarly, annual core inflation (which excludes prices of volatile agricultural produce) decreased 53bps to a twenty-four-month low of 11.2%. Overall, over Q1 18, headline inflation has moderated to 14.26% YoY on average (vs. average of 17.92% and 16.55% YoY in Q1 17 and FY 17 respectively).

• Irrespective, MoM (month-on-month) headline inflation tracked slightly higher (+4bps to 0.84%) on the rise in MoM food (+5bps to 0.90%) and core (+9bps to 0.84%). On food, the MoM pressure stemmed from processed food which rose 64bps to 1.62%. We note that processed food MoM inflation has been rising since the start of 2018. On the core segment, the rise in MoM inflation stemmed from increases in HWEGF basket (+8bps to 0.69%), Education (+8bps to 0.82%) and Clothing & Footwear (+3bps to 0.79%).

• The increase in the HWEGF basket is quite surprising to us given the moderation in energy prices over the month, according to data from the NBS. Specifically, on average, Kerosene (-6.8%), Premium Motor Spirit (-5.3%), Cooking Gas (-3.0%) and Diesel (-1.65%) were lower on a MoM basis. We think the increase is most likely tied to higher housing prices during the month.
• In terms of impact, with the sharp decline in headline inflation, currency stability and sharp accretion in the reserve (~$47 billion), the CBN is expected to accelerate its signaling of a rate cut with a slash in OMO stop rates at today’s auction. The CBN is looking to net-issue N33 billion (Issuance – N500 billion, Maturity – N467 billion). To our minds, we expect the apex bank to cut the rate on the 245-day to ~14% (prior auction: 14.3%) and close the year at 13%. On its traditional policy instrument, we hold the view that the MPC would cut the MPR by 200bps in H2 2018 to 12% in line with waning inflationary pressures.