In brief
- Nigeria’s headline inflation continued its upward trend in June 2023, albeit at a slower-than-expected pace, standing at 22.8% y/y in the month under review (+38bps compared to May 2023). The increase was mainly driven by food inflation, which recorded its strongest rise since September 2005, to hit 25.3% y/y in June 2023 (+44bps).
- Notwithstanding the authorities’ measures to unify the multiple exchange rate markets, we observed renewed widening of the spread between the parallel market rates and the official rate on the Investors’ & Exporters’ window. We expect the higher USD/NGN to sustain the elevated fuel prices and utility tariffs with upside risk to the near-term inflation.
- The effects of recent fuel subsidy removal with resultant spike in fuel and transport costs were not fully visible in the June 2023 Consumer Price Index (CPI). We believe this muted impact reflects policy time lag as only approximately two weeks of the policy measures were captured in the consumer price data. This time lag suggests continued upside risk over the coming months, making the slight uptick in the June 2023 inflation rate appear as an uneasy calm.
- The Monetary Policy Committee (MPC) will convene from 24th – 25th July 2023 for the first MPC meeting following President Bola Tinubu’s removal of fuel subsidies and easing of constraints on foreign exchange trading. Given the surprisingly subdued increase in the first post-reforms inflation, we anticipate the monetary policy review to focus on the magnitude of anticipated increase in the policy rate. We believe a marginal increase of 25bps to 18.75% would balance between the need to restore price stability and the risk to a weakening non-oil economic activity.
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