Bloomberg News

Nigeria Raises Benchmark Rate to 12% to Help Boost Naira

October 10, 2011

(Updates with comments by economist in fourth paragraph, Sanusi in seventh.)

Oct. 10 (Bloomberg) -- Nigeria’s central bank increased its key lending rate by 275 basis points to bolster the naira and curb price pressures in Africa’s biggest oil producer.

Governor Lamido Sanusi raised the policy rate to 12 percent, the highest since it was introduced in 2007, after a special Monetary Policy Committee meeting in the capital, Abuja, today. The increase was larger than all 11 forecasts from economists surveyed by Bloomberg. The bank also lifted the cash- reserve ratio to 8 percent from 4 percent.

The naira slumped 7.8 percent against the dollar since the beginning of August, adding to pressure on inflation as the government prepares to end fuel subsidies and raise spending next year. That threatens to push inflation, which eased to 9.3 percent in August, above the central bank’s target of 10 percent.

“This certainly isn’t a central bank that does things in half measures,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mail. “The changes announced this afternoon are huge, leaving little room for doubt in anyone’s mind about the resolve to maintain price stability in Nigeria.”

The naira was at 164.15 to the dollar as of 5:40 p.m. in the commercial capital, Lagos, down from 162 before the rate decision was announced.

Tighten Liquidity

The end of the banking crisis in Nigeria paved the way for the central bank to tighten liquidity conditions, Sanusi said. The country established the Asset Management Corp. of Nigeria last year as part of measures to buy bad debts and prevent a collapse of the banking industry after a crisis in 2008 and 2009 took some lenders to the verge of failure.

“The risks to the banking system of tighter liquidity conditions have been significantly reduced,” Sanusi said. This allowed the central bank to “address monetary and liquidity conditions more aggressively by tightening liquidity and raising domestic interest rates.”

Sanusi recommitted the central bank to maintaining exchange rate stability even after foreign-currency reserves declined, making it more difficult to maintain the naira peg.

“Maintaining exchange-rate stability, especially in times of global uncertainty, is crucial to the mandate of price stability,” Sanusi said.

Foreign-Currency Reserves

The central bank has been drawing down foreign-currency reserves to keep the naira within a 3 percentage-point band above or below 150 per dollar at its twice-weekly auctions. The naira broke through that level for a third time on Oct. 5, after the bank failed to meet mounting dollar demand for the 24th straight auction. Reserves have dropped 5 percent to $31.3 billion between Sept. 26 and Oct. 5.

Before today, the MPC had increased its benchmark interest rate at six of the past seven meetings by a total of 3.25 percentage points.

Inflation may accelerate next year as the government prepares to remove a subsidy on fuel, saving it 1.2 trillion naira ($7.3 billion). Nigeria earns 80 percent of government revenue from oil, the price of which has slumped 16 percent in New York since June 1, reaching $75.67 a barrel on Oct. 4.

“In the face of the specter of declining oil prices, declining foreign reserves, increased demand for foreign exchange, fiscal dominance and capital flow reversals, monetary policy must bear a larger burden of economic adjustment,” Sanusi said.

--With assistance from Simbarashe Gumbo and Nasreen Seria in Johannesburg and Chris Kay and Elisha Bala-Gbogbo in Abuja. Editors: Nasreen Seria, Karl Maier

To contact the reporters on this story: Maram Mazen in Abuja at mmazen@bloomberg.net; Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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