Nigeria Central Bank to limit interest-rate increases

Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi has indicated the apex bank may limit interest-rate increases to help spur lending, especially as demand for foreign currency eases, reducing

pressure on the naira. “We frontloaded a lot of the increase that people thought we’d do gradually over the year when the central bank raised its benchmark interest rate by 1 percentage point to 7.5 percent on March 22,” Sanusi said in an interview in Cape Town, yesterday, saying “it is aims at bringing inflation down below 10 percent.”

Rising energy and food costs this year pushed the inflation rate to an annual 12.8 percent in March, from 11.1 percent a month earlier, the statistics office revealed on April 18. While the central bank is aware of rising price pressures, it also wants to avoid undermining stability in the financial markets after using $4 billion to bail out banks in 2009, Sanusi stated.

“We did a massive increase relatively at the last Monetary Policy Committee,” Sanusi said in Cape Town, where he was attending the World Economic Forum on Africa. “Part of what we factored in was the expectation of increased spending during elections, the increased cost of energy, the possible reduction in fuel subsidies and other issues,” he added.

While monetary authorities will face a “very tough year” with energy prices surging, Nigeria’s central bank is “not only an inflation-targeting central bank,” Sanusi said.

The CBN said inflation pressure may ease as demand for foreign currency at the central bank’s bi-weekly auctions declines, following last month’s elections, reducing pressure on the naira. The central bank sold $350 million at Wednesday’s auction, compared with the demand of $383.3 million. That’s down from the average demand of $453.36 at the March auctions.

“With everything calming down, we expect pressure we’ve seen on the naira and demand at the auctions coming down,” Sanusi said.

The naira weakened 1.4 percent to 152.8 against the dollar yesterday, according to Bloomberg data.

Investment will probably pick up after the conclusion of elections, Sanusi said in an interview with CNBC Africa yesterday.

“A lot of decisions were delayed because of the elections,” he said.

Sanusi has been defending the naira, keeping it within 3 percent above or below 150 per dollar, in a bid to curb inflation. That policy was cited as a concern by the International Monetary Fund (IMF), which said in February, the central bank should allow for more exchange-rate flexibility to avoid depleting foreign currency reserves.

The CBN governor told CNBC Africa that surging fuel prices are putting pressure on reserves as import costs climb. Nigeria relies on fuel imports for more than 70 percent of its domestic needs because of a lack of refining capacity. Sanusi estimated in June last year the subsidy on domestic fuel prices will cost the government N520 billion ($3.4 billion) in 2010. (Business Day)