The Central Bank of Nigeria raised its benchmark interest rate for the first time in three years and devalued the naira as tumbling oil prices sent the currency to an all-time low.
The rate was raised by 100 basis points to a record high 13 percent, Governor Godwin Emefiele told reporters today in Abuja, the capital. Only one of nine economists surveyed by Bloomberg estimated the exact increase. Six predicted the bank would hold the rate at 12 percent. The naira’s official peg was moved to a midpoint of 168 per dollar, from 155, and its trading band widened to 5 percent either side from previous 3 percent.
“The current challenge requires bold policy measures, moves on both the demand and supply sides of the foreign exchange market,” Emefiele told reporters in the capital, Abuja.
Emefiele, 53, became central bank governor in June with a pledge to keep the currency stable and avoid raising interest rates before elections in February. His promise has proved difficult to keep as slumping crude prices erode government revenue in Africa’s top oil producer. The central bank also increased the cash reserve requirement on private sector deposits by 500 basis points to 20 percent.
“The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” Emefiele said. The government’s suggested budget benchmark oil price of $73 per barrel for 2015, down from $77.5 this year, may be “overly optimistic,” he added.
Powerful Signal
The naira is being overwhelmed by a drop in prices for oil, the biggest foreign-exchange earner, with the currency weakened to a record low of 178 per dollar on Nov. 24. While the central bank has stepped in to defend the currency, selling dollars outside its twice-weekly auctions, the interventions have reduced foreign reserves to a five-month low of $37.2 billion.
“While Nigeria cannot do much to influence the oil price, the combination of measures today sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” Razia Khan, head of Africa research at Standard Chartered Bank Plc in London, said in e-mailed comments after the decision.
Nigeria’s government is planning to cut spending by 6 percent next year in response to lower oil prices, Finance Minister Ngozi Okonjo-Iweala said Nov. 16. Okonjo-Iweala’s announcement followed Emefiele’s pledge to continue defending the naira. Oil accounts for 70 percent of government revenue.
The rate-setting Monetary Policy Committee last adjusted the benchmark rate in October 2011, when then-Governor Lamido Sanusi increased it by 275 basis points.