Nigeria Cuts Key Interest Rate to 8% to Boost Credit
Nigeria, Africa’s top oil producer, cut its key interest rate by 1.75 percentage points to boost bank lending and ease the economic slowdown, the first reduction in seven months.
The benchmark lending rate was lowered to 8 percent, Chukwuma Soludo, Governor of the Central Bank of Nigeria, told reporters today in Abuja after a meeting of the Monetary Policy Committee.
“If you have tight liquidity in the system, you have a condition that requires easing of monetary policy,” Soludo said. Commercial lending rates should moderate “in the near- term” in response to the bank’s efforts to improve liquidity, he added.
Interbank lending rates have risen after a slump in the stock exchange led many investors to default on loans. At least 1 trillion naira ($6.8 billion) was leant to speculators to buy shares as equities soared almost 13-fold since 2000, according to Bank of America Corp. Nigeria’s All Share Index tumbled 46 percent last year and 37 percent in 2009.
Reduced bank lending and lower revenue from oil are likely to crimp economic growth to 1.5 percent this year, according to Standard & Poor’s.
The Nigeria central bank has limited the maximum lending rate charged by commercial bank to 22 percent and the deposit rate to 15 percent as of April 1 to ease industry financing costs and boost growth.
Emergency Meeting
The benchmark interest rate had been on hold since a half- point cut at an emergency meeting on Sept. 18 that was called in response to the credit crisis.
The bank hasn’t followed other central bank and cut rates after the inflation rose in five of the last six months, reaching 14.6 percent in February. The rate rose on higher food costs due to a devaluation of more than 20 percent in the naira against the dollar since Nov. 26. The exchange rate has stabilized since Feb. 6.
The central bank decision sends “very confusing” signals, said Ayo Teriba, chief executive officer of Economics Associates, a Lagos-based company that advises businesses. “Cutting the rate means you should expect the naira to lose some more value.”
The naira’s official rate at the auction yesterday was 145.80 to the dollar, the local subsidiary of Citigroup said in an e-mailed note to clients today.
Downgrade
On March 27, Nigeria’s credit-rating outlook was cut to “negative” from “stable” at Standard & Poor’s amid the first global recession since World War II.
Even then, Soludo said financial conditions in the west African country remain “robust” and “there are no apparent systemic threats to the banking system.”
Citing figures provided by the Nigerian Bureau of Statistics, the governor estimated the economy expanded 6.3 percent in the first quarter, compared with 5.8 percent in the same period of 2008.