Nigeria Increases Benchmark Interest Rate Amid Threats of Faster Inflation
Nigeria’s central bank raised its benchmark interest rate by a quarter of a percentage point and increased the reserve requirement in an attempt to head off faster inflation.
The monetary policy rate was raised to 6.5 percent, Lamido Sanusi, governor of the Central Bank of Nigeria, said today in Abuja, the capital. The borrowing and lending rates were increased by the same margin to 4.5 percent and 8.5 percent respectively. The bank raised the reserve requirement to 2 percent from 1 percent.
What “speaks of the seriousness of the CBN’s tightening intentions, is the move to increase the cash reserve ratio,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note. “This time, the tightening is real.”
Sanusi, who aims to bring inflation below 10 percent from 11.8 percent in December, said price pressures “need to be reined in,” citing the risk from fiscal spending. Africa’s most populous country is seeking to curtail government expenditure after a surge in the past year on higher wages, elections due in April and the construction of power plants, roads and bridges.
President Goodluck Jonathan on Dec. 15 proposed to parliament a budget of 4.23 trillion naira ($27.8 billion) for this fiscal year, 19 percent less than was approved for 2010.
Nigeria also remains vulnerable to higher crude oil prices, even though it is the largest producer in Africa, Sanusi said. Nigeria has to refine most of its oil abroad and then bring it back into the country.
While the goal for inflation may be 9 percent, Sanusi said he won’t pursue that target at the cost of economic growth.
Nigeria’s economy, the second-largest on the continent after South Africa, will grow about 7 percent this year, compared with 7.8 percent in 2010, President Goodluck Jonathan said on Dec. 15.
Pressure on inflation may also come from higher food costs. World food prices rose to a record in December on higher costs for sugar, grain and oilseeds, the United Nations said Jan. 4, helping to push up Nigeria food costs by 0.9 percent in the month.
An index of 55 global food commodities tracked by the UN’s Food and Agriculture Organization gained for a sixth month to 214.7 points in December, above the previous high of 213.5 in June 2008.
The rate increase implies that recent declines in the inflation rate “have been outweighed by possible downside risks to the CPI outlook associated with loose fiscal policies and rising international energy and food prices,” Samir Gadio, emerging-markets strategist at London-based Standard Bank Plc, said in an e-mailed note.
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