Nigeria May Raise Key Interest Rate if Inflation Fails to Stay Below 10%

Nigeria’s central bank Governor Lamido Sanusi said policy makers are ready to keep raising interest rates if inflation fails to remain below 10 percent.

The central bank of Africa’s biggest oil producer is “not celebrating yet” after inflation eased to 9.4 percent in July, the slowest pace in more than three years. The bank is still concerned about “stubbornly high” core inflation, Sanusi said in an interview in Hong Kong today.

“I would like to wait and see if the drop is sustainable or a blip,” Sanusi said. “We’ll wait to see if it’s a trend. If it isn’t a trend, we may have to continue tightening.”

Turkey, Brazil and some other central banks have cut lending rates in the past month, concerned about Europe’s debt crisis and slowing global growth. Sanusi’s comments underscore how Nigerian policy makers are committed to keeping a lid on inflation, which has averaged about 11 percent since the start of 2007.

“We certainly are determined to show inflation does not get out of control,” Sanusi, 50, said.

Nigeria’s benchmark rate has been increased four times this year to 8.75 percent to rein in inflation and support the naira. Inflation data for August, which is due to be published next week, may be little changed from July, remaining slightly below 10 percent, Sanusi said.

The central bank is scheduled to make its next interest rate decision on Sept. 20.

Currency Peg

Sanusi said the bank will probably continue to maintain its currency peg even as oil prices slide. Nigeria has been drawing down foreign-currency reserves to keep the naira within a band of 3 percentage points above or below 150 per dollar. The Abuja- based central bank has failed to meet dollar demand at 17 consecutive currency auctions, held biweekly.

“We’ve seen a lot of demand pressure, but we think that’s temporary,” said Sanusi. “So long as we’re in the band, frankly we don’t worry. We don’t have to meet each and every demand at the official window. There is an interbank market and there are generous funds.”

The naira fell to 153.15 per dollar at an auction today, the weakest level since a June 22 sale, after the central bank sold $400 million, less than the $438 million demanded by lenders, the bank said in an e-mailed statement. In interbank trading the naira fell for a third day, declining 0.3 percent to 156.15 per dollar as of 3:30 p.m. in Lagos.

‘Little Choice’

“The Central Bank of Nigeria will hike the monetary policy rate even if inflation remains in single-digits in coming months,” Samir Gadio, an emerging-markets strategist at Standard Bank Group Ltd., said in e-mailed comments today. “Given the magnitude of the pressure on the naira in both the official CBN and interbank forex markets in recent months, the central bank has little choice but to tighten liquidity conditions further.”

Nigeria’s foreign-currency reserves have slid 11 percent to $32.3 billion in the year to Sept. 2, even as the country’s benchmark Bonny Light crude oil gained about 51 percent. The oil price has fallen 10 percent since its 2011 high on April 8.

Renaissance Capital said on Sept. 1 there’s a 40 percent probability that the naira could be devalued to 155 per dollar in 2012 as oil prices fall and the government increases spending on roads and railways, boosting imports.

“A central bank governor never says never, but the fundamentals don’t point to that at the moment,” Sanusi said, referring to a currency devaluation. “We haven’t reached a point where we think we can’t sustain exchange rates at the levels where they are.”

To contact the reporters on this story: Fion Li in Hong Kong at fli59@bloomberg.net; Chris Kay in London at ckay5@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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