Nigeria Holds Key Rate at Record High to Support Naira

The Central Bank of Nigeria left its benchmark lending rate at a record high for a 12th consecutive meeting to bolster the naira and keep inflation within its target.

Eleven of the 12 members of the Monetary Policy Committee voted to keep the policy rate unchanged at 12 percent, Governor Lamido Sanusi told reporters today in the capital, Abuja. That was in line with the forecasts of all 16 economists surveyed by Bloomberg News.

The naira has weakened 2.5 percent against the dollar this year and may come under more pressure as President Goodluck Jonathan estimates a 12 percent drop in oil and gas revenue in 2014. Sanusi said the bank is committed to use its foreign-currency reserves to support the naira. The central bank sells foreign currency at twice-weekly auctions to keep the naira within a range of 3 percentage points around 160 a dollar.

“We should be able to maintain the naira within our target band,” Sanusi said. “The message is that we’re committed to the stability of the exchange rate and we’ll not, unless we’re forced to, allow the naira to weaken.”

Inflation eased to 8.2 percent in August from 8.7 percent in the previous month, staying within the central bank’s target of less than 10 percent this year. The committee “noted with satisfaction” the inflation rate and forecasts it will remain under 10 percent for the next six months, Sanusi said. The rate “continued to moderate in response to the tight stance of monetary policy,” he said.

Looming Elections

Potential risks to inflation include “the possibility of pressures coming from the fiscal activities of government in the later part of the year” and ahead of general elections due in 2015, he said.

Jonathan’s government had nearly doubled the monthly minimum wage of government employees to 18,000 naira ($112) before the elections in 2011. Nigeria is scheduled to hold presidential, gubernatorial and parliamentary elections in 2015.

“The commitment to foreign-exchange stability to anchor inflation expectations remains in place,” Razia Khan, head of African economic research at Standard Chartered Plc in London, said in an e-mailed note to clients after the announcement. “The weeks ahead, and the performance of the currency, will likely determine what happens next.”

Anchoring Expectations

While foreign-currency reserves have declined in recent months, they have risen 9.9 percent in the past year, according to Sanusi. Since the last MPC meeting on July 23, reserves have dropped 1.8 percent to $46 billion as of Sept. 20, according to central bank data. Nigeria relies on oil proceeds for 80 percent of government revenue and more than 90 percent of foreign-currency income.

“We’re not looking for a stronger currency, we are also not looking for a weaker one; we want to have an anchor for expectations,” Sanusi said. “We think that ultimately is far more important than having reserves at $50 billion or $40 billion.”

Rising “non-import related demand” for foreign-currency is due “to the build up in political activities in the country and increasing resort to dollarization of the economy by the political class,” Sanusi said. “In the next few weeks you’ll see a series of policies from our side” in response, he said without giving details.

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