Nigeria central bank breaches its forex band ahead of rate meeting - CNBC Africa

Nigeria central bank breaches its forex band ahead of rate meeting

Western Africa

by Reuters 0

Nigeria's central bank sold dollars outside its preferred currency band at its forex auction on Monday. PHOTO: Central Bank of Nigeria

The move signalled that it could shift the band to weaken the naira after its policy meeting on Tuesday, dealers said.

The central bank usually sells dollars at its twice weekly forex auctions at 150-160 naira, a band it adopted in November 2011 after a decline in oil prices forced it to spend billions of dollars in reserves to defend the naira.

A slump in oil prices this year has pushed the naira down 10 per cent versus the dollar. On Monday the Nigerian currency hit a record low at the interbank window on concerns that a continuous slide in global oil prices could undermine the central bank's efforts to keep defending the currency, dealers said.

At its forex auction on Monday the central bank sold 198.87 million dollars at 162.50 naira. It was the second time in a row it has auctioned the dollar outside its band. At previous auctions it had sold up to 400 million dollars at 158.41 to the dollar, dealers said.

"With regards to a devaluation, we think the central bank's guidance has not matched its actions. We think the fact that the bank allowed for the official exchange rate to breach the upper band of the target range signals a devaluation," Yvonne Mhango, economist at Renaissance Capital said.

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The price of crude oil, Nigeria's main export, has fallen almost 30 per cent since July, compounding worries about the government's finances and political stability given an Islamist insurgency mostly in the northeast and tensions before elections early next year.

The central bank is widely expected to keep interest rates on hold at the end of a two-day meeting on Tuesday despite some pressure for an increase to support the naira.

It has vowed to defend the currency in the past, despite the drop in oil prices which has unnerved foreign investors and sent Nigeria's stock and bond markets into a tailspin.

Even though the bank has spent billions of dollars from its reserves to prop up the naira this year, the currency fell 1.58 per cent from its previous close against the dollar to 176.35 naira on Tuesday.

According to figures on the central bank's website, the bank has spent an average of 27.9 million dollars a day this year defending the naira, which has tracked falls in other emerging market currencies - notably those in economies that are particularly sensitive to changes in the oil price, such as the Russian rouble.

As of 20 November, the central bank's liquid reserves had fallen by 6.2 billion dollars, or 14.7 per cent, this year to 36.2 billion dollars, the figures show.

Analysts also expect the bank, at the end of Tuesday's meeting, to tighten liquidity by hiking banks' cash reserve ratio for private sector deposits to between 18 per cent and 20 per cent, from 15 per cent.

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