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Single-digit inflation to stimulate foreign portfolio investment

By BusinessNews Staff on May 29, 2014

The single-digit inflation anchored on the tight monetary policy will continue to support inflow of foreign portfolio investments (FPIs) in the country, a report has stated.

While it noted that this is expected to continue to attract arbitrage into the Nigerian market, the report by pan-African rating agency, Agusto & Co stated that it could also create a new cycle.

The consumer price index (CPI) rose to 7.9 per cent in April 2014. Core inflation, which is closely watched by the central bank because it excludes the volatility inherent in farm produce–rose by 7.5 per cent on a year-on-year basis.

The food index also rose by 9.4 per cent in April 2014 due to the slow growth in farm inventories.
The April inflation numbers suggest prices have been on the increase since February but still remain within the CBN’s single digit target of six per cent and nine per cent.

However, the report pointed out that capital inflow may lead to compression in yields.

“However, we do not see yields dropping to single-digit levels in the short term for two major reasons. Firstly, emerging and frontier markets are still exposed to risks around the US Fed’s tapering plans.

“The US Fed’s decision to wind down its Quantitative Easing (QE) policy has increased the vulnerabilities of emerging economies as investors reduce exposure to these economies. “Secondly, we believe country specific issues and policies will determine the level of vulnerabilities to the QE effect,” it explained.

To this end, it viewed Nigeria’s fiscal position which is being weakened by sustained oil theft that had led to a decline in output volume as credit negative.

Furthermore, Augusto & Co argued that output leakages put pressure on the government’s revenue position and affects accretion to the fiscal buffers.
“In the short term, the reduction in fiscal buffers and pre-election spending are factors that could affect the CBN’s capabilities in reining inflation as well as maintaining exchange rate stability.

“The insecurity in the food belts across the northern parts of the country occasioned by terror activities and clashes between farmers and cattle herdsmen, is also expected to push food prices higher, thus setting the food index on an upward trajectory.

“Despite these structural difficulties that hurt inflation targeting, the initial communiqué of the committee indicates that the ultimate goal of the CBN would be to transform Nigeria to a truly low inflation environment,” it added.

[This Day]

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