Bloomberg News

Nigeria Boosts Key Interest Rate to Record to Protect Naira

October 11, 2011

(Updates with naira’s gain in second paragraph.)

Oct. 11 (Bloomberg) -- Nigeria’s central bank increased its key lending rate by 2.75 percentage points to help bolster the naira and curb inflation in Africa’s biggest oil producer.

Governor Lamido Sanusi raised the policy rate to 12 percent, the highest since it was introduced in 2007, and doubled the cash reserves ratio to 8 percent yesterday. The naira surged 4.6 percent to 156.55 per dollar today, the biggest gain of more than 170 currencies tracked by Bloomberg.

Nigeria’s banking industry, which was threatened with collapse after a debt crisis in 2008, has stabilized with the government’s purchase of bad debts of lenders, paving the way for the central bank to tighten liquidity conditions, Sanusi said. Keeping the naira steady, even as lower oil prices make it more difficult to maintain the currency peg, is an important part of the bank’s strategy to control inflation, he said.

“The central bank chose a very clear intent to maintain currency stability,” Leon Myburgh, an economist at Citigroup Inc. in Johannesburg, said in a telephone interview. “It certainly was a surprisingly strong move, well beyond what the market had expected.”

The median estimate of 11 economists surveyed by Bloomberg was for the rate to increase to 10.25 percent, with 200 basis points being the highest forecast.

Declining Reserves

Nigeria’s 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.

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

Inflation, which eased to 9.3 percent in August, may accelerate next year as the government prepares to remove a subsidy on fuel, saving it 1.2 trillion naira ($7.5 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 as low as $75.67 a barrel on Oct. 4.

Kenya, Uganda

“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.

Nigeria joins policy makers in Kenya and Uganda in ramping up interest rates to protect their currencies. The central banks of the two East African nations boosted their key rates by 4 percentage points each last week after their currencies dropped by a fifth against the dollar this year, the biggest declines of more than 170 currencies tracked by Bloomberg.

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

“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 rate increase leaves “little room for doubt in anyone’s mind about the resolve to maintain price stability in Nigeria.”

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

To contact the reporters on this story: Maram Mazen in Khartoum at mmazen@bloomberg.net; Elisha Bala-Gbogbo in Abuja at ebalagbogbo@bloomberg.net

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


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