Analysis

The data released by the National Bureau of Statistics (NBS) was in line with our expectation as Headline Inflation continued its upward trajectory in October 2023, reaching 27.33% (September 2023: 26.72%). Conversely, the Headline Inflation sustained its month-on-month decline, contracting to 1.73% in October 2023 (September 2023: 2.10%).

Food Inflation exhibited a year-on-year increase to 31.52% in October 2023 (September 2023: 30.64%). However, on a month-on-month basis, it experienced a decline to 1.91% in October 2023  (September 2023: 2.45%).

Core Inflation, which accounts for all items excluding farm produce and energy, also rose to 22.58% in October 2023, in contrast to 21.84% reported in September 2023. However, on a month-on-month basis, Core Inflation experienced a decline to 1.39% in October 2023 (September 2023: 2.22%).

Outlook

Despite the month-on-month decline in Headline Inflation and its subset, the year-on-year rise remain a source of worry. The insecurity in food producing region in the country, and weak infrastructure continues to exert detrimental effects on the country’s food prices.

Policy Expectation

As per the scheduled calendar, the Monetary Policy Committee (MPC) is slated to convene next week, November 20th – 21st, 2023. Considering the country’s negative real return due to the elevated inflation rate, we expect the committee to maintain its tightening stance.

The CBN started using Open Market Operations (OMO) as a liquidity management tool, a move that increased the stop rate to 17.98% (1-year), thereby narrowing the gap with the MPR (18.75%). We view the move as a right step in the right direction.

Furthermore, 364-day treasury bill rose to 16.75% (spot rate) in the last auction. The hikes in the fixed income market shows the monetary authorities wants to keep the Naira attractive to both local and foreign investors (FPI).

What does higher interest mean for the Equities market?

The equities market might experience bearish trend due to higher opportunity costs in the fixed income market. The implication of higher interest rates for equities is the reallocation of funds by investors to capture higher yields.

Click here “October 2023 Inflation – Month-on-Month Decline Sustained” to view the full report.