BY EMMA UJAH, ABUJA BUREAU CHIEF

The Central Bank of Nigeria monetary policy committee yesterday raised its benchmark interest rate for the fifth time this year to 9.25 per cent, up from 8.75 per cent. Central Bank Governor, Lamido Sanusi, said the decision to further tighten monetary policy was to tackle future upward inflationary pressures, including high government spending and borrowing, implementation of a new minimum wage and likely removal of fuel subsidies.

He said the decision was also influenced by the need to support the local currency. “Concerns remain about sustaining the current inflation trend. The anticipated high liquidity would have a bearing on inflation in the near future,” Sanusi told newsmen in Abuja.

However the naira fell to its weakest in four months against the dollar at the inter-bank market after the CBN failed to clear demand for the dollar at its bi-weekly forex auction. The local currency closed at 156.80 to the dollar, its weakest since May 12 and lower from 156.20 at Friday’s close.

Bankers said strong demand for dollars and the inability of the CBN to meet demand at its auction had forced users of foreign exchange to redirect their bids to the inter-bank market, putting pressure on the naira.
 
Why CBN is tightening rates

On why the bank decided to further tighten monetary policy, raising rate for the fifth consecutive time, Sanusi said,  “what is the option?  The option is to have inflationary pressure that is short-termed through the exchange rate channel and in the medium to long-term through the direct monetary transaction channel.  And I think that of the balance, at this point, until we get a fraction of fiscal consolidation in particular, and until some of the new policies being put in place begin to show results, monetary policy has to come up and contain inflationary pressure.

“These expectations are however currently under threat from anticipated fiscal injections, increased government borrowing to finance the huge fiscal deficit in the 2011 budget, the recent upward revision of electricity tariffs and the anticipated deregulation of petroleum products prices, among other factors”.

Mallam Sanusi lamented that an analysis of the Federal Government expenditure between January and July showed that about 70 per cent was spent on non-recurrent, with mere 10 per cent on capital projects.

Deregulation

On the planned deregulation of down stream sub-sector of the petroleum industry, the CBN governor said although it would have huge cost for the economy in the short but, it would have long term benefits for the nation.

According to him, the nation’s economy was losing by importing products that keep refineries in other countries running while stifling investment in its refineries and petro chemical industries.

Said he, “the Central Bank, in spite of what we have said about the possible inflationary impact of deregulation, has been a consistent advocate of deregulation.  We are in support of it totally.  I know it will come with a huge short-term cost but in the long-term cost of petroleum subsidy to the economy far outweighs the benefits.

“Apart from the monetary and financial cost of subsidy on petroleum products we import, we are keeping refineries abroad open while discouraging investment in our own petroleum refineries and petrochemical industries.  In the medium term, we will all see the benefits of a deregulated petroleum industry.

I am aware that the coordinating Minister for the Economy Dr. Ngozi Okonjo-Iweala) had, in principle stated her commitment to deregulation and she has also stated her commitment to develop social safety nets before the full implementation of the deregulation