Fdc economic bulletin - November 9, 2015

Inflation Still Up At 9.5%

FDC Economic Bulletin

Financial Derivatives Company Ltd. : 01-7739889 www.fdcng.com

November 09, 2015

The upward inflationary trend that has persisted for most of 2015 is expected to continue in October. Our

forecast for October headline inflation is 9.5%, which is 0.1% higher than the level in September. If this

forecast is accurate, it will mean that headline inflation has increased in nine out of the 10 months this

year.

The factors leading to October’s moderate increase in consumer prices are similar to those that pushed up

prices in September. Imported inflation still persists as the effect of foreign exchange restrictions is still

being felt in the non-food basket. Though the favourable harvest season has muted inflationary pressures

from the food basket, prices of some food items such as rice are increasing. The higher price of rice can be

attributed to plans to raise the tariff on the commodity as well as the flood that affected some states in the

northern region of the country. In addition, the dip in power supply in October increased storage costs

just as the persistent insecurity in the northern region has affected the cultivation and supply of some

perishables.

With the recently screened ministers taking to the saddle, we expect that investor confidence will grow

despite the restrictive forex policy.

Source : NBS, FDC Research

Chart 1: Headline Inflation Rate

8.1%7.9% 8.0%

8.2%8.3%

8.5%8.7%

9.0%9.2% 9.2%

9.3% 9.4% 9.5%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Urban prices accelerated in October

The FDC Lagos urban inflation index increased to 12.38% in October, up 0.83% from 11.56% in September.

This is in line with the rising trend in headline inflation.

The y-o-y food index increased to 14.23% from 13.62%, while the y-o-y non-food index also increased to

11.44%, from 10.51% in August. The increase in the urban inflation was driven by the increase in food

prices for rice, tomatoes and onions, even though the harvest period muted increases in food prices in

general. We expect a further price increases in November as preparations for year end celebrations

increase.

Inflationary pressures across Sub-Saharan Africa (SSA)

Inflation is generally increasing across SSA. Angola’s inflation spiked further to a 3-year high of 11.66% in

September from 11.01% in August. The country’s rising inflationary trend has been driven by expensive

imports and dwindling oil revenue. Furthermore, Kenya’s inflation rose sharply from 5.97% in September

to 6.72% in October, due to inflationary pressures from housing rent, food and clothing. South Africa’s

inflation rate was flat at 4.6% in September same as in August. The higher housing rentals in South Africa

was offset by a fall in petrol prices.

African central banks are utilizing various monetary policy tools to contain inflation. For example, the

Central Bank of Angola maintained its interest rate at 10.5% during its policy meeting on 27 October.

Angola’s apex bank was compelled to maintain the basic interest rate due to the high level of inflation as

FD C E c on om ic Bul l et in Page 3


Source : FDC Research

Chart 2: FDC Urban Index

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Frui

ts

Palm

Oil

Ric

e

Yam

Oni

on

Mel

lon

Seed

s

Bea

ns

Tom

ato

Vege

tabl

es

Pepp

er

Pain

ts

Toile

trie

s

Det

erge

nt

Cem

ent

Ren

t

Ker

osen

e

Cook

ing

Gas

Tran

spor

tatio

n Co

st

Selected Non-FoodBasket Components

Selected FoodBasket

Components

well as the declining state of its oil industry. The Central Bank of Kenya and the South African Reserve Bank

also maintained their interest rates at 11.5% and 6% respectively.

Inflation outlook in November

We expect headline inflation to increase further in November as preparations for year-end festivities will

increase demand for both food and non-food items. This trend is expected to continue until the end of the

year due to higher spending during Christmas celebrations.

Next MPC meeting

The November 23rd/24th MPC meeting is the last MPC meeting of the year, baring any emergency meeting.

The Central Bank of Nigeria will have to make critical decisions to steer the country towards growth in 2016.

The monetary policy rate will be a key issue since it has been regarded by many as a barrier to achieving

economic prosperity.

Likely Market Response

Interest Rates

Given the importance of interest rates to fostering growth, we believe that it will be a key topic of discussion

at the MPC meeting; interest rates are more likely to be sensitive to the outcome of the MPC meeting.

Additionally, the recent decrease in interest rates due to the suppression of OMO may suggest the CBN’s

indirect adoption of an accommodative policy.

Exchange Rates

The CBN and Federal Government have maintained their positions on defending the naira from any further

devaluation despite less favourable terms of trade. We believe that the forex markets will be influenced by

any directives from the CBN, the current administration, as well as the position of Nigeria’s external

reserves, and is therefore unlikely to react to the inflationary trends.



Stock Market

The stock market has reacted negatively to the Q3 2015 results that have been released. We expect the stock

market’s plunge to continue just as international investors await new price bottoms. There will more bargain

hunting but the market will recover in January. Should the MPC make a decision on interest rates during its

meeting, the market will react given the inverse relationship between interest rates and stock prices.



Important Notice

This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation or

solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of

likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. All

rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with respect to any matter con-

tained herein.

Economy & Finance

Fdc economic bulletin - November 9, 2015