By Ademola Alawiye

There are strong indications that the Monetary Policy Committee of the Central Bank of Nigeria may increase the benchmark lending rate for the second time this year at the next MPC meeting scheduled to hold this week.

A source close to the MPC told our correspondent on Sunday that the committee would likely review the benchmark interest rate following increase in government spending ahead of the forthcoming elections as well as the increase in food and oil prices.

The source, who spoke in confidence because he was not permitted to speak officially, added that the rate might be increased by 25 or 50 basis points.

The MPC had increased the MPR to 6.5 per cent in January with the objective of bringing inflation below 10 per cent.

The CBN Governor, Mr. Lamido Sanusi, had listed rising government spending and liquidity in the banking system following the activities of the Asset Management Corporation of Nigeria as reasons the MPC might adopt more monetary policy tightening measures.

Analysts, who spoke in separate interviews with our correspondent, expected the MPC to raise the benchmark lending rate.

They said that the pressure on the naira ahead of elections, coupled with the just released 2011 Appropriation Bill, suggested that the committee might continue its monetary tightening policy.

The Chief Executive Officer, Financial Market Dealers Association of Nigeria, Mr. Wale Abe, said that the MPC would likely increase the benchmark lending rate.

Abe said, “They will likely increase the lending rate. There are all indications that spending in the economy will increase as we move close to the election period. The MPC will take a look at inflation on the one hand and election on the other hand.

“Also, there is a lot of upsurge in demand for foreign exchange. If the interest rate is increased, it will affect the demand for naira at the forex market. It will make the naira more expensive.”

Speaking in the same vein, the Managing Director, Sotice Investment Company Limited, Mr. Adedayo Toluwase, said that the ideal and likely decision that the MPC would take would be to increase the benchmark rate.

He said, “The appropriate decision that the MPC will take is to continue its tightening policy, which will help restrain liquidity and speculative demand for dollars. It will also give people the incentive to hold more naira.”

The National Assembly, last week, passed the 2011 Appropriation Bill of N4.97tn. The budget, as passed by the National Assembly, was N745bn higher than the N4.221tn proposal submitted by President Goodluck Jonathan on December 15, 2010.

The President had based his estimates on crude oil benchmark of $65 per barrel, but in passing the budget, the Senate increased the benchmark to $75 per barrel due to rising oil prices in the global market.

Consequently, N2.467tn was passed as recurrent expenditure and N1.562tn as capital expenditure.

The amount for debt servicing was also reduced from the proposed N542.3bn to N445.09bn, while N496.61bn was approved for statutory transfers.

 

Source: Punch