Making the Naira Stable
Nigeria’s central bank raised its benchmark interest rate for the third time this year and doubled the reserve requirement as it tries to stabilize the naira and counter the impact on prices of increased government spending.
The monetary policy rate rose by half a percentage point to 8 percent, Lamido Sanusi, governor of the Central Bank of Nigeria, said today in Abuja, the capital. The key borrowing and lending rates climbed by the same amount to 6 percent and 10 percent respectively, while the reserve requirement on banks was increased to 4 percent from 2 percent, Sanusi said.
The decision “reflects the central bank’s concerns over the inflation outlook and continued pressure on the exchange rate,” Samir Gadio, a London-based analyst at Standard Bank Group Ltd., said in an e-mailed statement. The increase “should help curtail liquidity and contain to some extent speculative pressures on the exchange rate.”
Inflation stood at 11.3 percent in April as the central bank struggles to bring it below 10 percent. Inflation expectations remain high, Sanusi said, calling on the government for tighter fiscal controls on oil revenue in Africa’s largest crude producer.
“Monetary policy will have to bear the burden of adjustment through further tightening in order to rein in inflation,” Sanusi said.
Fiscal Spending
Parliament has revised up government spending plans this year to 4.97 billion naira from the 4.22 billion naira proposed by the Finance Ministry. The government has rejected the increase and negotiations are continuing.
“Although the fiscal authorities have declared their intention to consolidate, the MPC recognizes that time will be required for fiscal adjustment to take place,” Sanusi said.
To ease pressure on prices, the central bank is selling more dollars to keep the naira within a range of 3 percent above or below 150 per dollar at twice-weekly auctions.
The bank sold all of the foreign currency sought by lenders for the first time in five auctions on May 16, fending off pressure that had sent the currency to its lowest interbank rate in 21 months a week earlier. The bank sold $499.8 million at the auction, the fourth-largest amount in two years.
The central bank has “clearly demonstrated that it is still keen to preserve exchange rate stability to control inflation, imports and investment,” Gadio said.
The naira weakened to 157 to the dollar on the interbank market today from 156.63 yesterday.
To contact the reporter on this story: Elisha Bala-Gbogbo in Abuja at ebalagbogbo@bloomberg.net.
To contact the editor responsible for this story: Antony Sguazzin in Johannesburg at asguazzin@bloomberg.net.
Author: Chief Editor
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