INTEREST rates may need to rise this year if the Federal Government pushes ahead with an expansionary budget, the Central Bank of Nigeria (CBN) governor said on Thursday.

This runs contrary to Finance Minister Ngozi Okonjo-Iweala's stated wish for a rate reduction. 'If we do have an expansionary budget plus the fuel subsidy removal, I think the likelihood is more for an increase than a cut,' Lamido Sanusi told Reuters at the World Economic Forum in Davos.

In the face of strikes and demonstrations, Nigeria this month agreed to partially reinstate a subsidy on fuel, but Sanusi said the action would still have an inflationary impact by pushing up the cost of transport, food and other goods.

Earlier, Sanusi had told CNBC Africa television that the bank would not raise interest rates at its first rate setting meeting of the year next week in direct response to removal of the fuel subsidy, as it was a first round effect.

Okonjo-Iweala said last month she wanted interest rates to be lowered in 2012, after budget plans were read to the National Assembly.

Since then, however, pressure has grown for a more expansionary budget with the Senate calling last week for a higher oil price benchmark that would have the effect of giving the government more money to spend and leave less for savings.