Nigeria's annual inflation rate surprisingly eased to 15.39% in August from 15.43% in July, according to data from the National Bureau of Statistics. This figure was lower than the 15.7% median estimate from a Bloomberg survey. Monthly inflation also saw a significant drop to 0.7% from 1.6% in July, marking its lowest pace this year. This disinflationary trend, coupled with falling market rates and a stronger naira, is increasing expectations for the central bank to resume its rate-cutting cycle.
Several factors are contributing to the growing sentiment for a rate cut. Gross external reserves rose to $54.209 billion by September 7, and the naira has stabilized around N1,320 to the dollar in the official window. Remittances through licensed operators reached a record $947 million in July. Additionally, the Central Bank of Nigeria (CBN) reduced the stop rate on the 364-day Treasury bill by 22 basis points to 16.62% at the September 9 auction, the third consecutive reduction for that tenor.
Despite the positive signs, some analysts express caution. Faruq Quadri, an economist at SPEC-Matrix, warns that rising crude oil prices could lead to increased transport and other domestic costs, potentially reversing recent disinflationary gains. Similarly, Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, highlights that a significant portion of current inflation is structural rather than monetary, suggesting that an early rate cut could reignite inflation. He believes that while further tightening is unnecessary, the central bank might maintain the current 26.5% policy rate due to persistent energy cost pressures.
Conversely, Abayomi Fashina, Group Risk Manager at STL Capital, believes the combination of softer inflation and declining market rates strongly supports a rate cut, anticipating a 50-basis-point reduction. The current Monetary Policy Rate is about 11.1 percentage points above August's headline inflation, indicating a restrictive monetary policy stance. The upcoming Monetary Policy Committee meeting will be a test of the CBN's confidence in the durability of Nigeria's disinflation, as they weigh the benefits of easing against the risks of renewed energy costs and election-related liquidity.
Food inflation, a significant component, also saw a decline, falling to 19.57% year-on-year in August and sharply slowing on a monthly basis to 1.02% from 5.56% in July. Food and non-alcoholic beverages continue to be the largest contributor to annual inflation, accounting for 6.16 percentage points. Other notable contributors include restaurants and accommodation services (1.99 percentage points), transport (1.64 points), and housing, water, electricity, gas, and other fuels (1.30 points).
