Nigeria’s lowest inflation rate in six months will positively affect borrowers but may put a frown on the faces of investors.
The National Bureau of Statistics reported that headline inflation slowed for the second consecutive month to 32.15 percent in August from 33.40 in July 2024.
On a month-on-month basis, the headline inflation rate in August 2024 was 2.22 percent, which was 0.06 percent lower than the rate recorded in August 2024 (2.28 percent).
Inflation can have several significant impacts on businesses, households and investors.
Monetary Policy Committee (MPC) likely to hold rate
As Nigeria inflation moves in the expectation of the CBN, Cardoso led Monetary Policy Committee is likely to hold rates next week for the first time since the establishment of the committee.
FBNQuest analysts said that given the anticipated moderation in August's inflation figure, the MPC may be nearing the end of its rate hike cycle.
“As a result, we anticipate that the committee will adopt a wait-and-see approach during its meeting later this month to assess the effects of previous rate hikes on the economy and monitor price developments,” FBNQuest analysts said.
This year the MPC has hiked rates by 800 basis points to 26.75 percent, to fight Nigeria's stubbornly high inflation.
Companies can expect stability in loan pricing
BusinessDay gathered that commercial banks set their lending rates between 28 – 30 percent after the most recent increase in the benchmark interest rates.
With the expected rate hold by the MPC next week, existing credit facilities to businesses will likely see some stability. Banks react more to increases in interest rates than otherwise.
Higher purchasing power for households
In August, positive gains from moderating food prices were sufficient in lowering the pace of Nigeria’s headline inflation, resulting in a drop to 32.15 percent.
According to Cardinal Stone, the drop in food inflation benefited from the ongoing harvest season in the southern states and the harvest of early-maturing crops—millet, yams, potatoes — in some northern regions.
As food prices decrease, the purchasing power of Nigerians increases. This means that over time, the same amount of money will buy more goods and services.
Impact on Investments:
Inflation affects different types of investments in various ways. Due to the 800 basis points hike in interest rates, yields on fixed income instruments skyrocketed this year. Treasury Bills for one peaked at 28.3 percent this year and recently began to decline.
Matilda Adefalujo, fixed-income analyst at Meristem Securities, said the plan of the CBN all along was to elevate rates to attract investors and to also align monetary policy rate with fixed income rates “and we saw that happen.”
“Now we are coming into a face of expansionary monetary policy, there’s a chance that they could hold rates at their next MPC meeting and you cannot embark on an expansionary policy and still be contractionary on fixed income yields,” Adefalujo said.
Expansionary monetary policy is a policy by monetary authorities to expand the money supply and boost economic activity by keeping interest rates low to encourage borrowing by companies, individuals and banks. Contractionary monetary policy is a policy used by monetary authorities to contract the money supply and reduce economic activity by raising interest rates.
