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UPDATE 3-Nigeria surprises with rate cut, lifts forex controls

Published 07/07/2009, 03:05 PM
Updated 07/07/2009, 03:17 PM
STAN
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* Nigeria cuts interest rates to 6 pct from 8 pct

* Central bank lifts foreign exchange controls

* Governor says no bank will be allowed to fail (Adds details, background)

By Randy Fabi

ABUJA, July 7 (Reuters) - Nigeria's new central bank chief surprised markets by slashing interest rates by 2 percentage points on Tuesday, as he also set about reforming the banking sector and lifted foreign exchange controls.

In his first monetary policy meeting as governor, Lamido Sanusi cut interest rates to 6 percent from 8 percent, which analysts saw as compensating for the tougher regulatory stance being taken.

The bank also restored the corridor of interest rates with lending at 8 percent and deposits at 4 percent. Previously, deposit rates were zero percent.

"The moves were overwhelmingly positive. The market thought that because the central bank was focusing on liberalising of the FX regime, it would hold off on interest rates for now," said Razia Khan, head of Africa research at Standard Chartered in London.

"This is a very bold move, which speaks to their intention to clean up the banking sector," she added.

The global downturn exposed cracks in Nigeria's economic reforms, highlighting its failure to save as much oil income as it could and leaving regulators scrambling to defend its currency and capital markets.

Sanusi forecast a slightly slower growth rate for the Nigerian economy, but also said he expected inflationary pressures to ease later this year ahead of the country's harvest.

"We think the rate cut is an indication that the (central bank) is prioritizing economic growth over inflation concerns and we think he has the flexibility to do that," said Weyinmi Omamuli, economist for Lagos-based Asset Management & Financial Advisory.

Nigeria's economy is expected to have grown by 5.13 percent in the second quarter this year, down from 5.20 percent during the same period last year, Sanusi said.

Consumer inflation in May eased to 13.2 percent year-on-year in May from 13.3 percent the previous month, according to the National Bureau of Statistics.

BANK REFORMS

Sanusi announced the immediate lifting of capital controls imposed earlier this year after a slide in the country's currency, the naira, triggered by a sharp fall in world oil prices and foreign investor outflows.

The relaxation of the restrictions is positive news for foreign investors who had been unnerved by a lack of clear commitment on when the return to a freely-determined exchange rate might come, analysts said.

Sanusi said there was some "stress points" in Nigeria's banking system, but added that no bank would be allowed to fail.

The central bank also said it would guarantee all interbank placements from banks and pension funds from July 2009 to March 31, 2010. "This should stop the current overheating in the system and exert a downward pressure on interest rates," Sanusi said.

The central bank also said all Nigerian banks must adopt common accounting standards by the end of the year.

(For full Reuters Africa coverage and to have your say on the top issues, visit: http://af.reuters.com/) (Additional reporting by Chijioke Ohuocha in Lagos and Ed Cropley in Johannesburg; Editing by Ron Askew and Leslie Adler)

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