Nigeria's central bank increased its benchmark interest rate by 50 basis points to 9.5 percent on Tuesday to combat inflationary pressures, Governor Chukwuma Soludo said after a Monetary Policy Committee (MPC) meeting. He said the Central Bank of Nigeria (CBN) would issue new primary instruments to mop up anticipated excess liquidity, which it expected would run into tens of billions of naira. Soludo said the MPC had decided to signal a tightening of monetary policy after noting that the federal government budget for 2008 projected significant increases in expenditure. He said the MPC decisions were "in anticipation of the imminent fiscal surge and continuing capital inflows, and in order to drive core inflation down to single digit as well as to sustain headline inflation along its present path".

Chukwuma Soludo, CBN Governor

Economists welcomed the rate hike, which clarified Nigeria's monetary policy stance. The MPC had sent confusing signals to the markets after its last meeting in October. "This was absolutely the right thing to have done. In view of the risks Nigeria needed to tighten policy," said Razia Khan, regional head of research for Africa at Standard Chartered Bank in London. Nigeria's headline inflation has been in single digits all year but economists say food prices have a disproportionate weighting in the overall basket while core non-food inflation, which has been above 10 percent since August, is the real worry. Non-food inflation came in at 10.7 percent year-on-year in October, while the overall figure was 4.6 percent year-on-year. Soludo said CBN staff projections were for headline year-on-year inflation to move to 6.8 percent in November and 7.3 percent by the end of the year, though this would moderate in the first quarter with help from CBN liquidity mop-up action.

He said broad money supply, or M2, grew at an annualised rate of 33.3 percent in September and 39.6 percent in October, driven by an increase in the banking sector's foreign assets and a rapid rise in credit to the private sector. "While the MPC expressed concern about the rapid growth of M2, it however noted with relief that this did not translate into higher inflation during the year, partly on account of the sharp increase in non-oil output," he said. The new primary instruments would be treasury and central bank bills and the CBN would issue them when necessary, Soludo said, adding that the maturity structure of the bills would be decided according to the need. He declined to give a timetable. As well as the increase in spending planned in the 2008 federal budget, economists are concerned about plans to disburse billions of dollars in oil savings next year. The International Monetary Fund has warned that such disbursements could lead to sharply higher inflation, much slower growth, or both. The saving of oil revenues above a pre-determined budget price is one key factor in the macro-economic stability Nigeria has enjoyed since it launched reforms in 2003. It has helped rein in inflation at a time of booming oil prices. However, state governors have argued that the federal government was illegally retaining revenues that belonged to the states. Under a political compromise that is still being finalised, the federal government is expected to disburse close to $4 billion of the savings over the course of 2008. Soludo has said the central bank wanted the disbursement to be staggered in order to avoid a spike in inflation.