By Camillus Eboh
ABUJA, July 26 (Reuters) - Nigeria's central bank ramped up its benchmark interest rate by a bigger than expected 200 basis points to 14 percent on Tuesday in a bid to underpin its battered currency and attract more investment.
Africa's biggest economy last month ditched its 16-month-old dollar peg to let the naira trade freely and lure back foreign investors who fled both the equities and bond markets in the wake of the plunge in crude prices.
But the local currency has since plunged and the supply of dollars has dried up, putting pressure on the central bank to hike interest rates to attract investment.
Faced with the choice to spur growth by cutting rates or tackle galloping inflation, five out of eight members of the monetary policy committee opted for a rate increase, central bank governor Godwin Emefiele told reporters.
"We took a lot of time to deliberate on whether to favour growth against inflation," he said. "Members were of the view that an upward adjustment of interest rates would strongly signal not only the bank's commitment to prize stability... but also its desire to gradually achieve positive real interest rates."
By raising the benchmark the central bank hopes to lure back more foreign bonds investors although, with inflation hitting a decade-high of 16.5 percent in June, rates are still in negative territory.
Fund mangers cautiously welcomed the move but said more was needed.
"This is very positive, but they still have some way to go," said Kevin Daly, a member of the investment committee at Aberdeen Asset Management in London. "We are not ready to go back yet but it's starting to get more interesting."
In a Reuters poll, the median forecast of 13 analysts taken July 18-21 predicted that Nigeria would raise interest rates by 100 basis points to 13 percent.
The naira which has been allowed to trade more freely over the past week, has touched record lows around 312 per dollar.
Koon Chow, EM Macro and FX strategist at UBP Asset Management, said the bigger-than-expected hike was "a small step towards getting some credibility for the naira."
He added that the greater freedom allowed to the naira in recent days would "start to address investor concerns that the FX market is still heavily managed".
While the central bank hopes to see more foreign inflows, Emefiele said the economy was unlikely to have rebounded in the second quarter after contracting in the first quarter.
"In addition, the implementation of the 2016 budget in the second quarter remains slower than expected," he said.
Emefiele also said Nigerian banks remained strong after the central bank replaced the management of Skye Bank when it failed to meet minimum capital ratios.
"There is no need for anybody to begin to panic or worry that any bank is in distress," he said.
The central bank also held its existing cash reserve ratios for commercial banks at 22.5 percent. (Reporting by Ulf Laessing, Alexis Akwagyiram and Sujata Rao; Editing by Ed Cropley and Richard Balmforth)
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