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Budget 2019 inflation projection unattainable — FDC

Expects Dec’18 rate at 11.28%

By Babajide Komolafe

ANALYSTS at Financial Derivatives Company, FDC, have contradicted the 9.98 percent inflation projection for budget 2019, saying it expects inflation reading for December 2018 at 11.28 percent.

This was the highlight of the company’s biweekly bulletin released last week and titled, “Annual headline inflation to increase but monthly price level down”.

“ We are forecasting that headline inflation will increase to 11.37 percent in December from 11.28% in November. If our projections are actualized, it will mean that directionally the change in annual inflation is now becoming a trend”, they stated.

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Attributing the higher inflation rate in December to increased spending due to the yuletide season and increased statutory allocation to the three tiers of government in December, they said: “Typically, December is a period in which higher festive related spending pushes up aggregate demand in the economy. Anecdotal and empirical evidence in December 2018 has validated this phenomenon. Compounding the demand pull effect of festive spending was the surge in Feration Accounts Allocation Committee (FAAC) by 3.12 percent to N812.76 billion.

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“This means that State Governments and Federal agencies had more liquidity during the period. Also worth mentioning is that the slope of the inflation curve is getting steeper, suggesting that the 2019 budget inflation benchmark of 9.98 percent may be unattainable. The average inflation rate in 2018 was 12.14 percent down from 16.54 percent, the 2017 average.”

In their projection for the month-month inflation rate, they said: We anticipate a moderation in monthly inflation (which is more reflective of current prices) to 0.67 percent (8.36 percent  annualized) from 0.8 percent  (10.02 percent  annualized) in November. This would be driven by higher agricultural output and an increase in manufacturing activities. This rise in manufacturing activity is evidenced by the PMI increase to 60.2 points in December.

“Other inflation moderating factors include: a 1.38 percent increase in on grid power supply, a 2.23 percent decline in M2 growth buttressed by a sharp drop of 68.84 percent in the opening position of banks.”

On the implications of the higher inflation rate in December, the FDC analysts said: “An uptick in Nigeria’s inflation at a time when the US inflation is declining and the US Fed is more committed to interest rate hike tilts the interest rate differential in favor of the US. This increases the probability of naira depreciation. Following the international Fisher effect equation (which states that an exchange rate is expected to change equally in the opposite direction of the interest rate differential) the naira needs to be devalued by at least 10 percent  to keep investors’ indifferent. The MPC could also consider a tighter monetary policy stance.”


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