Analysts at Renaissance Capital (Rencap) believe Nigeria’s slowing inflation rate will not hit single digit by the end of 2018.
Inflation rate is currently 12.48%, the 15th consecutive month of disinflation. According to Rencap Nigeria’s inflation rate will close in 2018 at a sticky 11%. This is contained in a report made available to Nairametrics.
In 2019, we expect structural factors to keep inflation sticky at c. 11%. So, expect no policy change. Rencap
The rather pessimistic view is due to “structural factors” which are issues like infrastructure, route to market, tight regulations, taxes, government spending and fiscal policies etc. these issues are typically thought to be outside the control of the Central Bank, which is why most analysts believe monetary policy can only do little to reduce inflation rate.
Based on this, they also believe the CBN will not reduce MPR when it closes it deliberates at the MPC today.
Note: CBN Monetary Policy Committee voted to leave rates at 14% for the 9th straight time.
Nigeria is on its own
Rencap’s view of Nigeria’s inflation rate is an exception to other African countries who they believe have seen their inflation rates bottom out.
In terms of slowing inflation, Nigeria is the exception in the countries under our coverage, in that inflation has yet to bottom. Rencap
No Effect on Lending
Rencap expects a rate cut to happen in July and when it does the CBN could cut rates to 13%. Nevertheless, they believe this won’t reduce lending rates as banks believe OMO (rate at which CBN borrows from banks) are likely to remain high in-spite of an MPR cut.They also opine that lending rates are unlikely to fall as banks see higher treasury bills rate as a factor for keeping rates high in the near term.
We see the policy rate being cut by 1 ppt at the July and September meetings, respectively, bringing it down to 12% at YE18. This is not likely to have a meaningful policy easing effect, as open market operations will keep yields elevated. At our 16-18 May Annual Pan Africa 1:1 Investor Conference in Lagos, the banks said lending rates are unlikely to fall on the back of rate cuts, as Treasury bill yields are of greater influence. Rencap
They also opine banks are also not going to increase lending to the private sector in leaps as CBN maintains tight cash reserve requirement (amount banks are allowed to keep in reserve. The higher the CRR the less banks have to lend).
They (banks) also do not see the CBN lowering the cash reserve requirement for fear of undermining the FX rate. We think this implies the impact on credit growth, which stood at 0.3% YoY in March, will be small, at best. Lower yields will likely spur a pick-up in lending in 2018; the banks are guiding for 10% credit growth. Rencap
What this means
- Much as we celebrate a rebounding economy and lowering inflation rate, Nigerians or at least businesses are not expected to receive any benefits this year.
- With lending rates expected to remain high and banks still stifled by policy induced lending caps, businesses will continue to find alternative means of sourcing capital.
- Already, we have seen an uptick in companies sourcing capital in the bond market and this is likely to persist while the CBN remains hawkish.
- Multinationals are already leading this charge just as local blue chip companies join the fray.
- For smaller business, an uptick in informal borrowing will also persist. Most SME now resort to borrowing from quasi finance companies, who lend at rates as high as 5% monthly.