Naira appreciates by 3.4% after CBN intervention

Posted by admin Headlines Tuesday, October 11th, 2011

he naira strengthened on Tuesday, gaining 3.4 per cent at the inter-bank market a day after an aggressive interest rate hike by the Central Bank of Nigeria designed to shore up the value of the currency.

The naira opened at N158.60 against the dollar at the inter-bank market, representing an increase of 3.4 per cent from Monday’s close of N164.30.

The value also represented an increase of five per cent from the record low of N167.8 recorded before the Monetary Policy Committee’s meeting on Monday, making the naira the world’s best-performing currency on the day.

The CBN had hiked its benchmark interest rate by 275 basis points to 12 per cent from 9.25 per cent and also raised the cash reserve ratio to eight per cent from four per cent on Monday to counter pressures on the currency and inflation.

The CBN is committed to keeping the naira within a three per cent band of N150 to the dollar, but the band has come under pressure in the last month due to concerns about inflation and high government spending.

It has now sold dollars outside the weakest boundary of the band at its last three auctions as the gulf between the official window and inter-bank market has widened.

The tightening, according to currency dealers, will create an incentive for investors to hold the naira and free up dollar supply.

They, however, said that the CBN would have to back its actions by meeting the dollar demand at its auctions.

Reuters quoted CitiBank’s Treasurer, Mr. Akin Dawodu, as saying, “The tightening will make the naira very scarce, although that will not last very long; but it will give foreign exchange a boost. This move will give the CBN a start to achieve its immediate objective but what will help is meeting up demand at subsequent auctions.”

Meanwhile, Nigeria’s bond yields and inter-bank rates rose sharply after the increase in interest rate as markets aligned.

Currency traders said yields rose across board on three, five and 20-year bonds after the announcement of moves to curb excess demand for the dollar and reduce naira liquidity.

The overnight inter-bank lending rate rose to 14.83 per cent from 11.50 per cent on Monday as market liquidity further tightened up with some banks recalling funds from their creditors to help them meet their new cash reserve requirements.

Traders said with the CRR increase to eight per cent from four per cent, over N800bn funds would be sterilised at the CBN vaults, leaving the market with little to place in the market.

-Vanguard