Nume Ekeghe

Analysts have reiterated that relative stability in the foreign exchange (FX) market is playing a crucial role in easing inflationary pressures.

This is coming as Nigeria’s inflation rate declined for the second consecutive month in February, dropping by 1.3 percentage points to 23.2 per cent year-on-year—the lowest level since June 2023.

Analysts attribute this trend to a combination of high base effects, improved food supply from late harvests, and the federal government’s strategic intervention in grain distribution.

According to a report by Afrinvest, food inflation, which constitutes 40 per cent of the inflation basket, declined significantly by 2.6 percentage points to 23.5 per cent year-on-year in February. Meanwhile, core inflation, which excludes volatile items such as farm produce and energy, edged higher to 23.0 per cent from 22.6 per cent in the previous month.

The moderation in headline inflation follows the recalibration of Nigeria’s inflationary trends after a sharp drop in January due to a rebasing exercise. On a month-on-month basis, the headline inflation rate printed at 2.0 per cent in February, while food and core inflation stood at 1.7 per cent and 2.5 per cent, respectively down from 10.3 per cent and 10.9 per cent in January.

Despite these improvements, risks remain. Analysts warn that recent developments, such as Dangote’s decision to suspend the supply of Premium Motor Spirit (PMS), could drive prices higher adding, “Additionally, lingering demand-supply imbalances in the FX market pose a threat to long-term price stability.”

According to the analysts: “Looking ahead, we anticipate further moderation in inflation on the back of sustained foreign exchange stability (as the CBN remains committed to supporting the home currency) and relative stability on energy goods, being major inputs to production. However, factors like the recent development on Dangote suspending the supply of Premium Motor Spirit (petrol) in Nigeria could drive prices higher, while the persistent demand-supply imbalance in the FX market could threaten long-term stability.”

Meanwhile, the Monetary Policy Committee (MPC) has held interest rates steady for three consecutive months following aggressive rate hikes totaling 875 basis points in 2024. Analysts suggest that this approach is likely to continue in the short term, given the recent inflation trajectory.

“However, the possibility of a rate cut at the next MPC meeting, scheduled for May 19-20, will depend on sustained improvements in macroeconomic indicators.

“On the home front, Nigeria’s headline inflation moderated yet again, by 1.3ppts to 23.2 per cent y/y in February, marking the second consecutive deceleration in the year and the lowest since June 2023 (22.8 per cent). This was majorly on the back of food inflation declining significantly due to the high base year effect and the price relief owing to late harvest and strategic supply intervention of grains by the Federal Government.

“Food inflation, which accounts for 40.0 per cent of the basket, declined to 2.6ppts y/y to 23.5 per cent in February. Meanwhile, core inflation, which excludes the prices of farm produce and energy bucked this trend as it printed at 23.0 per cent y/y from the previous 22.6 per cent. As anticipated, the month-on-month headline rate registered at 2.0 per cent to better reflect reality from the 10.7 per cent m/m decline recorded in January due to the rebasing exercise. In the same vein, food and core inflation sub-baskets printed at 1.7 per cent and 2.5 per cent respectively, from the 10.3 per cent and 10.9 per cent recorded in January. Furthermore, we can partly attribute the ease on price pressures to relative stability on FX within the month as it does play a major role in inflation,” the report concluded.