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Nigeria's central bank raises benchmark rate to 14%

Nigeria's central bank ramped up its benchmark interest rate by a bigger than expected 200 basis points to 14 percent on Tuesday in a bid to underpin the naira, which has hit a string of record lows recently.

Nigeria ditched its 16-month-old dollar peg to let the naira trade freely last month and lure back foreign investors who fled both the equities and bond markets in the wake of the plunge in crude prices.

But the local currency has plunged since and the supply of dollars has dried up, putting pressure on the central bank to hike interest rates to lure back foreign investors.

The Nigerian Central Bank is seen in Abuja, Nigeria, Monday, December 11, 2006.
Bloomberg | Bloomberg | Getty Images

In a Reuters poll, the median forecast of 13 analysts taken July 18-21 predicted that Nigeria would raise interest rates by 100 basis points to 13 percent.

Five out of eight members of the monetary policy committee voted in favor of a rate increase, central bank governor Godwin Emefiele told reporters after a two-day policy-setting meeting.

"Such a decision, it was argued, gives impetus to improving the liquidity of the foreign exchange market," he said. "Members were of the opinion that this would boost manufacturing and industrial output, thereby stimulating growth."

The central bank kept its existing cash reserve ratios for commercial banks.

Nigeria's oil struggle

Nigeria's economy contracted in the first quarter. Emefiele said Africa's biggest economy was unlikely to have rebounded in the second quarter.

"In addition, the implementation of the 2016 budget in the second quarter remains slower than expected," he said.

Emefiele said the flexible foreign exchange regime had worked well despite complaints from traders about a lack of liquidity on the interbank market.

"So far so good," he said of the new rules.

Alan Cameron, an economist at Exotix, said the rate hike had been higher than expected.

"It marks a return to more market-oriented economics. If you had drawn up an investor wish list in January, you could say that now we have got most things on that list," he said, referring to the naira float and the rate hike.

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