Nigeria leaves key rate at 12 pct as expected

ABUJA - Nigeria's central bank kept its benchmark interest rate on hold at 12 percent on Tuesday, saying it expects any upward impact on inflation from removing fuel import subsidies to be short-term.

All but one of nine analysts surveyed by Reuters had expected rates to remain at 12 percent.

Nigeria Central Bank Governor Lamido Sanusi

Nigeria partly removed subsidies for petrol this month, increasing the pump price to 97 naira from 67 naira and pushing up the cost of transport, food and other goods.

Inflation eased to 10.3 percent in December, down from 10.5 percent in November but the impact of removing fuel subsidies is likely to send that figure higher.

The central bank expects inflation to increase to around 14-15 percent in the first half of this year, before reducing towards single digits by the end of 2013.

"It (central bank committee) commended the Federal Government on the partial removal of subsidy on PMS (petrol) which it noted will have salutary effect on the external reserves and exchange rates as well as on investments in oil and gas," Central Bank Governor Lamido Sanusi said, while announcing the Monetary Policy Committee decisions.

"The committee noted historically an upward adjustment in the price of PMS (petrol) has tended to have a short-term impact on the rate of inflation."

Nigeria's national assembly is considering a 2012 budget proposal put forward by President Goodluck Jonathan last month, which would raise overall spending but begin efforts to reduce the funds going to government and cut the fiscal deficit.

BENCHMARK OIL PRICE

The budget proposal was based on a benchmark oil price of $70 per barrel, anything earned over that level is put into the Excess Crude Account (ECA) as a buffer against potential oil shocks. Savings can also be used in a recently set-up sovereign wealth fund.

Nigeria's Senate said on January 20 it wanted to raise this benchmark price to $75, giving more money to government and less for savings. Sanusi urged lawmakers to keep a benchmark price at no more than $70.

The ECA contained more than $20 billion in 2007 but despite a period of record high oil prices since, the account has been drained and only contained $3 billion at the end of last year.

"There is a concern that the National Assembly may decide to raise the oil price benchmark ... which may not be much, but would indicate that large segments of the political elite are still opposed to the idea of fiscal consolidation," Samir Gadio, emerging market analyst at Standard Bank said.

Interest rates were hiked six times last year, rising from 6.25 percent to 12 percent between January and December, in an effort by the regulator to curb rising inflation and stabilise a weakening naira currency.

The naira has shown signs of recovering after CBN lowered its target band in November, due to prolonged naira weakness and high U.S. dollar demand.

The naira traded at 161 to the dollar on Tuesday, slightly weaker than the CBN's preferred trading band of 150-160 naira against the dollar, which was retained at Tuesday's meeting. The November move shifted the band from 145-155.

Foreign exchange reserves stood at $34.10 billion on January 27, up from 32.64 billion a year ago, according to the CBN.

The central bank kept its 200 basis point corridor around the benchmark interest rate, so its recommended deposit rate is 10 percent and its lending rate is 14 percent. The cash reserve required to be held by banks was left at 8 percent of deposits.

Source: Reuters