Nigeria to Keep Benchmark Rate at Record to Fight Inflation

Nigeria’s central bank will probably keep its key interest rate at a record high as it continues to push for currency stability and lower inflation before elections in 2015.

The Monetary Policy Committee of Africa’s top oil producer, led by Governor Lamido Sanusi, will keep the rate at 12 percent, according to all 12 economists surveyed by Bloomberg. Sanusi is scheduled to announce the decision at a press conference that begins at about 2:15 p.m. today in the capital, Abuja.

The Central Bank of Nigeria has maintained the benchmark rate since October 2011 to help stabilize the naira and keep price pressures under control. While that’s helped to bring inflation down to the lowest level in more than five years, it may not be enough to persuade the MPC to ease borrowing costs as Nigeria faces the threat of rising government spending in a pre-election year.

“We’re stuck at 12 percent until after elections,” Alan Cameron, an economist at FCMB U.K. Ltd. in London, said by phone yesterday. The bias over the next six to 12 months “is towards further tightening,” he said.

President Goodluck Jonathan’s ruling Peoples Democratic Party is facing its biggest test since the end of military rule in 1999 after a series of defections to the main opposition party. While Nigeria plans to spend 4.9 trillion naira ($30.6 billion) in this year’s budget, little changed from 2013, Sanusi has warned of the threat of rising spending.

Naira Peg

Nigeria’s inflation rate rose for a second month to 8 percent in December, boosted by non-food costs. The bank is targeting inflation in a range of 6 percent to 9 percent for this year.

Unchecked government spending may lead to an acceleration in inflation, adding to pressure on the local currency, which the central bank pegs in a range of 3 percent either side of 155 to the dollar. The naira has gained 0.8 percent against the dollar in the past six months and was trading at 159.58 on the interbank market as of 9:39 a.m. in Lagos.

The main risks to inflation “are a loss of domestic fiscal discipline in the election build-up and a tightening in the monetary stance of the leading central banks,” FBN Capital Ltd. strategists, led by Gregory Kronsten in London, said in an e-mailed note to clients yesterday.

Sanusi, who is due to leave his position when his term expires in June, said in an interview in November that the bank may raise borrowing costs if government spending surges in a pre-election year.

Cash Reserve

The central bank may increase the cash reserve requirement for banks after introducing a 50 percent limit on public sector funds in July, said Cameron. Raising the limit to 100 percent will give the central bank greater oversight over public spending, an issue that’s of concern to Sanusi, Cameron said.

Sanusi criticized the state oil company in an interview last week for retaining $10.8 billion in revenue, saying it’s undermined the nation’s savings and exposed Nigeria to possible price shocks. The Nigerian National Petroleum Corp. has said it spent the money on pipeline repairs, fuel subsidies, crude losses and reserve fuel.

With a reserve requirement of 100 percent, “there’s no point for a commercial bank to take deposits from the government, it just goes straight to the central bank,” Cameron said.

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