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Naira firms, yields rise after rate hike

By on March 26, 2011

THE naira firmed against the United States dollar and inter-bank lending rates rose yesterday after the Central Bank hiked its key interest rate by a surprise 100 basis points to 7.5 per cent, traders said.

The naira, which eased to its weakest level against the dollar in 18 months last week, firmed to trade at 154.50 from 154.90 at Tuesday’s close and 155.90 on Monday.

Traders said with Tuesday’s tightening of monetary policy, the cost of borrowing should reduce pressure on the exchange rate.

“The interest rate hike coupled with the rising stock of foreign reserves should reduce pressure on the foreign exchange market within the next few days,” one dealer said.

Traders said month-end dollar inflows from some oil firms were trickling in, helping to strengthen the naira.

Inter-bank lending rates rose across the board by around 1 percent in reaction to the interest rate move, dealers said.

CBN raised its benchmark rate as it seeks to ward off the effect of rising government spending ahead of elections next month. Most analysts had expected a narrower rise of 25-50 basis points.

Yields on Nigeria’s five-year and 20-year government bonds rose although dealers said the market, which is traded over the counter making transparent pricing difficult, was still digesting the news.

“People are not showing quotes for fear of how the market will react,” one trader said.

The yield on the five-year paper rose to 12.6 per cent from 11.9 per cent at Tuesday’s close, while the 20-year paper — Nigeria’s longest tenor government debt — rose to 13.9 per cent from 13.4.

No quotes were yet being given for the three-year paper, which closed at 10.7 percent on Tuesday, but dealers said they expected it to open at around 11 per cent.

Source : The Nation