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Nigeria just pulled an unexpected move to support its beleaguered currency
(A man sits near mortars arranged in a local market in Suleja town in the outskirt of Nigeria's federal capital Abuja July 29, 2010.Akintunde Akinleye/Reuters)
Nigeria's central bank unexpectedly hiked rates in its first decision since depegging its currency, the naira, from the US dollar.
The Central Bank of Nigeria raised its key interest rate by 200 basis points, up to 14.00% from 12.00% on Tuesday. The majority of economists surveyed by Bloomberg expected the bank to hold.
This decision suggests that the bank is looking to regain control of its beleaguered currency given that the hike comes at a time when Nigeria is struggling with looming economic crisis.
"The Central Bank of Nigeria’s latest rate hike is a belated attempt to regain control over the country’s weakening currency," argued John Ashbourne, Africa economist at Capital Economics, in a note.
"Indeed, we believe that worries about the stability of the naira were at the heart of today’s decision," he continued. "Policymakers seem to have decided that falling real output is a price worth paying for shoring up the currency."
(Capital Economics)
Nigeria's central bank unpegged the naira from the US dollar in late June, and promised to pursue a flexible exchange rate system. The currency fell by about 30% down to 280 naira per dollar that day, compared to the pegged rate of 197-198 per dollar.
Meanwhile, Nigeria's been looking at some tough times on the economic front as well. In late May, the Nigerian Bureau of Statistics revealed that the country's economy shrank by 0.4% year-over-year in the first quarter, and economists have suggested that the second quarter likely fared even worse as a result of the earlier fuel-shortage crisis and various oil-production disruptions.
Moreover, the country has been failing to keep inflation under control, with the rate accelerating to 16.5% in June — the highest level since 2005.
Still, Ashbourne also argued that "while today’s hike may help to boost confidence in policy-making, it is unlikely to be enough to eliminate the pressures acting on the currency."
He wrote that his team expects that interest rates will stay negative in real terms over the coming months. Plus, the naira is much weaker on the black market than on the official market.
"Given the significant strains in the balance of payments that are keeping the currency under pressure, we expect that further policy tightening will be necessary over the coming months," he added.
The naira is trading around 300 per dollar as of 2:31 p.m. ET.
(Investing.com)
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