Bloomberg News

Sanusi May Raise Nigeria Rate Amid Pressure to Devalue Naira

October 10, 2011

(Updates with naira in seventh paragraph.)

Oct. 10 (Bloomberg) -- Nigerian policy makers, who will probably raise the key lending rate today as inflation pressures mount, may also consider devaluing the naira as lower oil prices make it more difficult to maintain the currency peg, economists said.

Governor Lamido Sanusi, who will chair the unscheduled policy meeting, will raise the policy rate a percentage point to 10.25 percent, according to the median of 11 estimates in a Bloomberg survey. All the economists surveyed expect an increase with the size of the move ranging from half a percentage point to 2 percentage points.

Inflation, which eased to 9.3 percent in August, may accelerate after the government last week said it plans to end fuel subsidies and raise spending next year. At the same time, the central bank has drawn down foreign currency reserves to $31.3 billion from $33 billion on Sept. 26 to maintain the naira peg

“This time they have to become aggressive,” Samir Gadio, an economist at Standard Bank Group Ltd., Africa’s biggest lender, said in a phone interview from London. “Our expectation is for the bank to raise the rate at least 200 basis points to send a clear signal to the market that they won’t allow a disorderly depreciation of the currency.”

The central bank has been using foreign-currency reserves to keep the naira within a 3 percentage-point band above or below 150 per dollar at its twice-weekly auctions. It broke that band the third time on Oct. 5, after it failed to meet mounting dollar demand for the 24th straight auction.

Naira Depreciation

Policy makers responded on Oct. 7 by stopping foreign- currency purchases by oil-exporting companies at its twice- weekly auctions. The naira gained the most in two years against the dollar in interbank trading after the announcement.

Before the new rule was announced, the naira depreciated by 1.7 percent to 164.15 per dollar, the weakest since at least 1994, when Bloomberg started compiling the data. The currency was down 1.7 percent today to 162.85 per dollar by 11:13 a.m. in Lagos.

While a devaluation is a “possibility, I think they will rather raise interest rates,” Stuart Culverhouse, chief economist of Exotix Ltd. in London, said in a phone interview. “I don’t think a small increase would make a difference, nor do I think they will want to do anything more dramatic. They will try to find a balance.”

The Monetary Policy Committee has increased its benchmark interest rate at six of the past seven meetings to 9.25 percent. The bank aims to keep inflation below 10 percent. Sanusi will announce the decision in the capital, Abuja, at 4:30 p.m. local time.

Fuel Subsidy

Nigeria, Africa’s biggest oil producer, imports most of its fuel products because of a lack of refining capacity. The Budget Office said in its medium-term fiscal proposals to Parliament last week that it will remove a subsidy on fuel from next year, saving the government 1.2 trillion naira ($7.5 billion).

Rising demand for dollars, in part to purchase fuel, is making it more difficult for the central bank to maintain its peg. The central bank, which sells foreign currency at twice- weekly auctions, sold $400 million at the Oct. 6 auction, compared with $685.4 million demanded by lenders, at 155.40 naira.

“They do not have any particular control over the naira at this particular time,” Ayodele Akinwunmi, head of research at FSDH Securities Ltd., said in a phone interview from Lagos today. “The only option they have at the moment is to devalue the currency.”

Oil has slumped 17 percent in New York since June 1, reaching as low as $81.36 a barrel on Oct. 7. Nigeria’s government earns about 80 percent of its revenue from oil.

“We expect the monetary policy rate will be hiked by 50 basis points,” Gregory Kronsten, chief economist of FBN Capital, the investment banking and asset management unit of First Bank of Nigeria Plc, said in a phone interview from Lagos. “The central bank has a process to manage the exchange rate. It will move the central rate to 161 to 162 naira.”

--With assistance from Andres R. Martinez in Johannesburg, Simbarashe Gumbo in Johannesburg and Chris Kay in Abuja. Editors: Nasreen Seria, Andrew J. Barden

To contact the reporters on this story: Maram Mazen in Khartoum at mmazen@bloomberg.net; Nasreen Seria in Johannesburg at nseria@bloomberg.net

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


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