The Central Bank of Nigeria will probably keep its benchmark lending rate unchanged at a record high to bolster its foreign-currency reserves and support the naira after oil prices fell last month.
“Their primary concern is the currency,” Alan Cameron, an economist at CSL Stockbrokers Ltd. in London, said by phone. “Their goal is to maintain high interest rates until they can find a substitute for portfolio inflows” with reforms pending in other areas of the economy, such as the power industry, he said.
Portfolio inflows have slowed this year partly because of the decline in oil prices, said Cameron. Africa’s largest oil producer relies on crude exports for about 80 percent of government revenue and more than 90 percent of foreign income, according to the central bank. Bonny Light crude, one of Nigeria’s main export grades, has declined 4.8 percent this year.
The inflation rate rose to 9.1 percent in April from 8.6 percent the previous month, staying within the central bank’s target of less than 10 percent. Consumer-price growth will probably remain between 9 and 11 percent this year, Sanusi said on March 24.
While Sanusi said he supports keeping the benchmark rate unchanged, three MPC members voted for a reduction in the March 19 meeting, up from two in January.
“Even though inflation is in single digits, that in itself doesn’t guarantee that the exchange rate will be resilient,” Samir Gadio, a London-based emerging-markets strategist at Standard Bank Group Ltd., said by phone. The Nigerian central bank “feels that if you let the currency weaken, then you’re going to have an impact on inflation, on investment, on other key macroeconomic variables.”
Nigeria is also battling an insurgency by Boko Haram Islamists, with President Goodluck Jonathan declaring emergency rule in three northeast states on May 14 to tackle militants he said were taking over parts of the region. Islamist attacks have been restricted to Abuja and the mainly Muslim north, leaving oil facilities and financial markets in the commercial hub of Lagos, in the south, undisturbed.
The yield on the 16.39 percent government bond maturing in January 2022 rose 15 basis points, or 0.15 percentage point, to 11.44 percent on May 20 from the last MPC meeting on March 19, according to latest data compiled by Bloomberg. Bonny Light crude fell to $107.32 a barrel yesterday from $110.67 on March 19. It reached a low of $100.31 on April 17. The Nigeria Stock Exchange All-Share Index has advanced 29 percent this year, the world’s sixth-best performer.
“They need to send a signal to the market that the fundamentals for carry trade, which are high interest rates, aren’t going to go away anytime soon,” said Cameron. “They don’t want to jeopardize portfolio inflows because they fear the oil prices may fall.”
Foreign-currency reserves declined 0.8 percent to $48.5 billion on May 16 from May 2, after rising by a third in the previous year, according to central bank data. The naira has dropped 1.4 percent against the dollar since the beginning of the year and was trading at 158.25 naira as of 15:24 p.m. yesterday in Lagos, the commercial capital.
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