Nigeria raises key interest rate to lure ‘Lukewarm’ investors

Nigeria raised its monetary policy rate to lure foreign investors and prop up its currency, even as the economy risks slipping into recession.

The Monetary Policy Committee increased the key lending rate to 14 percent from 12 percent, Central Bank of Nigeria Governor Godwin Emefiele told reporters in the capital, Abuja, on Tuesday. That was in line with the forecast of two of the 15 economists in a Bloomberg survey. Two predicted a 100 basis-point increase and one said policy would be tightened by 300 basis points. The rest expected rates will be left unchanged.

The MPC “noted that the negative real interest rates did not support the recent flexible foreign-exchange market as foreign investors’ attitude had remained lukewarm, showing unwillingness in bringing in new capital,” Emefiele said. An increase in borrowing costs “gives impetus for improving the liquidity of the foreign-exchange market,” he said.

The central bank removed a peg of 197-199 naira per dollar in June after 15 months, causing the Nigerian currency to devalue by more than a third. The naira weakened beyond 300 per dollar for the first time on July 22 and traded at 365 on the parallel market as the central bank sold treasury bills and bonds and continued to block importers of selected items, including steel products and rice, from the interbank market.

Credibility Gain

“The only reason why they are tightening now is to attract foreign portfolio investors and gain some credibility” so that the foreign-exchange market can take off, Adewale Okunrinboye, an analyst at Asset & Resource Management Co Ltd., said by phone from Lagos. “The liquidity levels there are very low, so it would be good to have those foreign investors back.”

Inflation in Africa’s biggest economy accelerated to 16.5 percent in June as the cost of gasoline and food surged due to higher import prices caused by dollar shortages blamed on a 15-month currency peg. Price-growth quickened as Nigeria’s economy contracted 0.4 percent in the first quarter. It may shrink by 1.8 percent this year, according to the International Monetary Fund.

“The Committee noted that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth,” Emefiele said. “While the situation called for obvious tightening of the monetary policy stance, the technical recession confronting the economy and the prospects of negative growth to year-end needed to be factored into the policy parameters.”

The inflation rate could reach 20 percent by December, due to shortages of foreign currency and higher prices for dollars on the parallel market, and rising energy costs, according to Gene Leon, the IMF’s resident representative in Nigeria.

“They did it because the MPC probably realized inflation was accelerating much quicker than they expected,” Kevin Daly, a money manager at Aberdeen Asset Management Plc, which oversees about $10 billion of emerging-market debt, said by phone from London. “We’re in a period where inflation will go higher still. And who knows where the naira will settle before we start seeing dollars flowing back in. It could be 340 or 350.”

The naira weakened 4.9 percent to 310.50 per dollar by 5:47 p.m. in Abuja.

Five members of the MPC voted to raise borrowing costs and three favored holding the rate, according to Emefiele. The committee kept the cash-reserve ratio at 22.5 percent and left the liquidity ratio at 30 percent.

“I think the interest rate decision will be supportive of foreign-exchange inflow. That indirectly could support growth,” Ayodeji Dawodu, a research analyst at Investment One, said by phone from Lagos. “Whether it will work immediately, that is another thing.”