Divergent Outlook Over inflation in Q3

• Divergent Outlook Over inflation in Q3

Businesses and consumers have differed in the expectations of the direction of the inflation rate in the third quarter of the year.

Meanwhile there was consensus of optimism about further naira appreciation and improved macro-economic performance in the third quarter.

These were highlights of the Business Expectations and Consumer Expectation surveys conducted by the Central Bank of Nigeria (CBN) in the just concluded second quarter.

The inflation rate has been on the downward trend since February falling from 18.72 per cent in January to 16.25 per cent in May

The CBN survey, however, revealed that while firms expect the inflation rate to moderate, consumers expect it to rise in the third quarter.

The CBN stated: “The outlook of businesses for the next quarter (Q3) however indicated greater confidence on the macro economy at 47.5 points. The drivers for this optimism were services (19.2 points), wholesale/retail trade (12.2 points, industrial (11.6 points and construction (5.3 points) sectors. Majority of the respondent firms expect the naira to appreciate in both the current and next quarters. Respondent firms expect inflation to rise in the current quarter but moderate in the next quarter.”

The apex bank also added: “The consumer outlook for the next quarter (Q3) and that of the next 12 months were however positive at 21.3 and 34.2 points respectively. The outlook could be attributed to the anticipated improvement in Nigeria’s economic conditions, expected increase in net household income, and expectations to save a bit and/or have plenty over savings in the next 12 months. Most respondents expected that borrowing rate will fall and naira will appreciate in the next 12 months, while inflation and unemployment will rise.

June PMI indicates increased economic expansion

Meanwhile, the CBN’s Purchasing Managers Index (PMI) report for the manufacturing and non-manufacturing sectors show that more sub-sectors recorded growth during the month of June 2017. The report showed that 27 out of the 34 subsectors surveyed during the month recorded growth, up from 20 subsectors that recorded growth in May. In the manufacturing sector, 12 subsectors recorded growth while four subsectors contracted. In the non-manufacturing sector, 15 subsectors recorded growth while three subsectors contracted.

The report stated: “The Manufacturing PMI stood at 52.9 index points in June 2017, indicating expansion in the manufacturing sector for the third consecutive month.

Expansion in the manufacturing sector

Twelve of the 16 sub-sectors reported growth in the review month in the following order: computer & electronic products; paper products; plastics & rubber products; primary metal; transportation equipment; petroleum & coal products; appliances & components; textile, apparel, leather & footwear; furniture & related products; electrical equipment; food, beverage & tobacco products and fabricated metal products. The remaining 4 sub-sectors declined in the order: nonmetallic mineral products; cement; chemical & pharmaceutical products and printing & related support activities.

“The composite PMI for the non-manufacturing sector grew to 54.2 in June 2017 indicating growth in Non-manufacturing PMI for the second consecutive month. Of the 18 non-manufacturing sub-sectors, 15 recorded growth in the following order: utilities; water supply, sewage & waste management; finance & insurance; educational services; repair, maintenance/ washing of motor vehicles; agriculture; health care & social assistance; information & communication; electricity, gas, steam & air conditioning supply; real estate, rental & leasing; wholesale trade; professional, scientific, & technical services; transportation & warehousing; accommodation & food services and arts, entertainment & recreation. The public administration, management of companies and construction sub sectors recorded contraction in the Non –manufacturing PMI in June 2017”.

Cost of funds to stabilise this week

Cost of funds in the interbank money market is expected to stabilise this week due to anticipation of improved system liquidity. Last week short term cost of funds fell by average of 359 basis points due to liquidity inflow of N276 billion from matured treasury bills, which cancelled out the effect of N86 billion outflow through purchase of secondary market bills on Friday. This coupled with reduction in outflow for dollar purchase caused interest rates on Collateralised Lending and Overnight lending to fall by 342 bases points and 375 basis points respectively. While interest rate on Collateralised Lending fell to 5.33 per cent on Friday from 8.75 per cent the previous week, interest rate on Overnight lending dropped to 5.75 per cent from 9.5 per cent the previous week.

Investigation showed that the market will experience N187 billion inflow from payment of matured treasury bills, which the apex bank will mop-up by selling equal amount of bills during the week. Notwithstanding, analysts were optimistic that cost of funds will be stable during the week. According to analysts at Cowry Assets Management Limited, “We expect financial system liquidity ease and resultant stability in interbank rates.

Similarly, analysts at Vetiva Capital Management Limited stated: We expect the improvement in system liquidity to continue to spur demand in the fixed income market in the coming week. Also, with the CBN signalling its intention to reduce T-bills rates (with the lower rates seen in recent OMO auctions), we see further room for increased buying activity in the T-bills market particularly.”

Naira records mixed performance

In spite of the $195 million injected into the interbank foreign exchange market and $130 million injected into the Bureau de change segment, the naira recorded mixed performance in the foreign exchange market last week.

While the naira appreciated by N1.5 in the parallel market, it depreciated by N4.28 at the Nigeria Autonomous Foreign Exchange (NAFEX) segment. While the parallel market exchange rate dropped to N366 per dollar last week from N367.5 per dollar the previous week, the NAFEX rate rose to N366.44 per dollar from N362.16 per dollar within the same period.

During the week, the CBN continued its intervention by selling $195 million in the interbank market on Wednesday. A breakdown of the intervention showed that authorized dealers in the wholesale window segment received a $100 million, while the Small and Medium Enterprises (SMEs) and invisibles windows were allocated the $50 million and $45 million, respectively. In addition to this, the CBN sold $40,000 to each of the 3,145 bureaux de change (BDCs) across the country.