The Federal Government may allow the naira to appreciate about two per cent against the dollar this year to help contain inflation.
An economist with the Standard Chartered Bank, Razia Khan, who disclosed this in notes to clients, on Thursday, said the Central Bank of Nigeria might increase “Open Market Operations” and allow the naira to rise as a way of curbing price increases. The bank reduced the benchmark lending rate by two per cent to eight per cent on Wednesday.
“The most powerful anti-inflation tool at their disposal could be letting the naira strengthen,” London-based Khan said on Thursday.
Nigeria’s currency gained 1.5 per cent last year after the nation used an oil-price windfall to pay off $35bn in foreign debt and build up foreign currency reserves.
The naira was trading at N127.515 per dollar in Abuja as at Thursday. It may gain to N125 per dollar by year-end and “possibly higher than that,” Khan said.
The rate cut came eight days after the new administration was sworn in following the general election in May.
Nigeria, with a population of more than 140 million, introduced a benchmark interest rate of 10 per cent on December 4, 2006 to keep tighter control of inflation.
“There isn’t much that’s changed in the real economy” since December, Khan said, and the slowdown in inflation was largely due to technical changes to the basket of products used to calculate price increases. Wednesday’s rate decision may be “politically motivated,” she wrote in her note.
Nigeria’s annual inflation rate slowed to 4.2 per cent in April, the National Bureau of Statistics said on May 17.
The CBN has said its goal is to ensure inflation does not rise above 10 per cent. Nigeria has Africa’s second-biggest economy.
Meanwhile, Nigeria sold more than double the amount of foreign currency offered at an auction, said Director of Trade and Exchange at the CBN Mrs. Omolara Akanji.
The CBN sold $219.4m at the twice-weekly auction on Thursday, after offering $100m.
One dollar was sold for N127.49 at the last auction on June 4, the CBN said on Thursday on its Web site, while at trading between banks, a dollar was sold for N128.15, Lagos- based Sterling Bank Plc said in a research note on Wednesday.
On the parallel market on the street, a dollar buys as much as N128.5.
The gap between the official and the parallel exchange rate has narrowed since the CBN began liberalising the foreign-exchange trade in March 2006, in a bid to discourage illegal dealing in the currency.
The naira gained 1.5 per cent against the dollar last year.