Abuja — The Central Bank of Nigeria (CBN), in a bid to create sanity and ensure stability in the foreign exchange market, is set to issue fresh guidelines through a detailed circular to banks on the foreign exchange operations in the country.

It emerged last night that the apex bank may sanction an unnamed bank for sharp practices in the forex market.

The bank is said to have been queried by the CBN over its dealings in the market and auditors are also said to have been detailed to investigate the bank's transactions.

"If the bank's explanation is not found satisfactory, it will be barred from the forex market," a senior official of CBN told THISDAY last night.

The naira has been on a freefall in the last three months, prompting fears about possible speculative dealings and arbitrage by some of the financial institutions in the country.

The CBN has also left the monetary policy rate (MPR) unchanged at 9.75 per cent despite rising inflation, which had trended up to 16.1 per cent in December 2008 from 15.3 per cent in the preceding month.

Year-on-year headline inflation rate had also risen from 6.6 per cent in December 2007, with core inflation rate shooting up to 10.4 per cent in December 2008 from 3.6 per cent in the corresponding period of the previous year.

Similarly, the apex bank has also resolved to actively use open market operations (OMO) to mop up excess liquidity from the system with a view to achieving effective liquidity management.

Briefing newsmen on the outcome of the meeting of the monetary policy committee (MPC) yesterday in Abuja, the CBN Governor, Professor Chukwuma Soludo, said concerned with achieving multiple objective of sound financial system, price and exchange rate stability, as well as ensuring that credit continues to flow to the rest of the economy, the committee had decided to keep MPR unchanged at 9.75 per cent.

MPR, the rate at which banks borrow from the CBN, which had remained at 9.75 per cent since December 2008, had been moved down from 10.25 per cent to 9.75 per cent in September last year. The MPR indicates the availability at which the banks could get funds at the CBN.

Soludo said the MPC was addressing the paradoxes in the economy: that is, having excess liquidity, existing with high interest rate as well as the excess liquidity pushing up inflation rate and affecting the exchange rate and; excess liquidity in the system with low growth in credit.

He said after the MPC meeting that, "the paradox we face currently is that excess liquidity is co-existing with rising interest rates, which in real terms and in relation to the deposit rate seem to be high. On the other hand, we need to tighten liquidity to address inflation and exchange rate concerns; while on the other hand, we would need to address high interest rate by relaxing monetary conditions".

He lamented that the MPC had observed that "high food prices throughout the year continued to drive headline inflation. Interest rate tended upwards from the third quarter and remained elevated through November but moderated in December".

Soludo said the CBN was "seriously concerned" about the rising lending rates and especially the re-pricing of existing facilities by banks as well as the wide spread between deposit and lending rates.

Given this scenario, he said, the CBN will be "meeting with bank chief executive officers to agree on modalities to check excesses, especially in the light of the global economic and financial crisis".

The CBN governor said: "To anchor expectations and stabilise the exchange rate, the MPC remains committed to managing the exchange rate within a band of +/- 3 per cent until further notice."

He added: "The difference between the CBN buying and selling rates shall not be more than 1 per cent; while that of banks and the BDCs will not be more than 1 per cent and 2 per cent, respectively around the CBN rate."

Previously, there had not been a peg on the spread between the buying and selling rates.

He revealed that the CBN was sending a detailed circular to banks on fresh guidelines yesterday, for the operations of foreign exchange market in the country

According to him, "In terms of pricing in the various segment of the market, we would be sending out detailed circular today about operations in the market. It's just to streamline operations and make sure that there will be no abuses of the Retail Dutch Auction System.

"Clearly to be transparent about the pricing of the foreign exchange by the CBN, we want to be clear to the public, including those that potentially used to sell foreign exchange that the CBN purchase from the banks, the oil companies and so on and so forth. We want to communicate our pricing mechanism that the CBN buying and selling shall not be more than 1 per cent. In other words, the differential between the rate at which we sell and at which we buy shall not be more than 1 per cent. It could, in fact, be less than 1 per cent."

Soludo said: "The committee noted the sharp depreciation in the naira rate that took place in all segments of the foreign exchange market in December 2008, following the sudden surge in demand, induced largely by the perceived negative impact of the global financial crisis.

"The induced inflow to the economy has constrained supply to the market leaving the CBN as the main source of foreign exchange. However, with the measures taken in January 2009, the exchange rate depreciation has moderated.

"The deepening recession in industrialized economies and the slowdown in economic activities of emerging countries, the fall in capital flows into Nigeria through remittances and foreign investments and the drying up of credit lines for Nigerian banks would, in the view of the committee, impact negatively on Nigeria 's external and fiscal positions."