The Monetary Policy Committee left the policy rate at 12 percent, Governor Lamido Sanusi told reporters in the capital, Abuja today. That was in line with 12 out of 13 economists surveyed by Bloomberg News. The amount of cash as a percentage of deposits that commercial banks must hold with the central bank was increased to 12 percent from 8 percent while the net open foreign exchange position was cut to 1 percent from 3 percent, Sanusi said.
The MPC boosted borrowing costs by 5.75 percentage points last year to bolster the naira and help curb the cost of imports. Inflation in Africa’s top oil producer accelerated to 12.9 percent in June after the government partially removed a subsidy on gasoline in January, staying above the central bank’s target of 10 percent.
“This is one of the most difficult MPC meetings in recent times,” Sanusi said. “You have a slowdown in growth, at the same time you’ve got very strong inflationary pressures. The central bank has to continue to focus on price stability, and while controlling inflation isn’t everything, certainly if we lose stability then there will be nothing.”
The naira has dropped 1.4 percent against the dollar on the interbank market since the last MPC rate decision on May 22, reaching its lowest level this year of 163.5 on June 15, according to data compiled by Bloomberg. The central bank sells foreign currency at twice-weekly auctions to restrict the naira at about 3 percent above or below 155 per dollar.
The naira was at 160.70 a dollar by 3 p.m. in Lagos, unchanged from before Sanusi began speaking. Reserves rose 0.9 percent to $37.2 billion on July 19 from the end of May, according to Sanusi.
“By adjusting the cash reserve ratio rather than the monetary policy rate, the central bank has effected far more aggressive tightening than would otherwise have been the case,” Razia Khan, the head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note to clients after the decision.
The move will probably strengthen the naira, and “is expected to drive overnight rates even higher than their recent peaks, with the impact likely to be felt across the yield curve,” she said.
The central bank is under pressure to ease borrowing costs to support the economy as growth is set to slow to 6.4 percent this year. The economy expanded 6.4 percent in the second quarter compared with 6.2 percent in the previous three months, Sanusi said today. Finance Minister Ngozi Okonjo-Iweala said on July 2 commercial bank rates of 20 percent may be restricting private investment, undermining growth in Africa’s most populous nation.
A possible decline in oil prices because of the global economic slowdown is a threat to Nigeria’s outlook, Sanusi said. The country must build reserves to strengthen the naira and protect the economy from external shocks, which would “feed into an already existing inflationary spiral,” he said.
Nigeria depends on oil exports for 80 percent of government revenue and more than 90 percent of foreign-exchange income.
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