Nigeria raised its benchmark interest rate by 25 basis points to 6.5 percent on Tuesday and took aggressive measures to tighten liquidity as its seeks to get inflation down to single digits.

The monetary policy committee (MPC) raised the cash reserve requirement for banks to 2 percent from 1 and lifted the liquidity ratio to 30 percent from 25, a bid to tame inflation by reducing lenders' ability to create more money.

Central Bank Governor Lamido Sanusi said the committee had voted by an 11-1 majority to raise the benchmark rate by 25 basis points, describing it as a continuation of the normalisation of monetary policy after the financial crisis.

The banking system is returning to normalcy and (there is) need to anticipate inflationary pressure and confront inflation before it gets out of hand, Sanusi told a news conference.

The MPC maintained a corridor of plus/minus 200 basis points around the benchmark rate for its lending and deposit rates.

Consumer inflation in sub-Saharan Africa's second biggest economy eased to 11.8 percent year-on-year in December from 12.8 percent the previous month, but has remained stubbornly in double digits for over a year.

Sanusi said inflation remained a risk as the new Asset Management Corporation of Nigeria (AMCON) -- a bad bank set up to absorb bad loans in the wake of a $4 billion bank bailout in 2009 -- recapitalised lenders.

An anticipated rise in government spending in the run-up to presidential, parliamentary and local elections in April as well as rising global food and energy prices were also threats.

Inflation remains a major concern and can't be ignored in the short to medium term, Sanusi said.

We are quite content to get it down to 9 percent ... and if we can do that with out compromising the health and security of the financial system or further slowing down growth then that's what we'd pursue, he said.

YIELDS SEEN RISING

Analysts said that while the increase in the benchmark rate had been broadly expected, the rise in the cash reserve and liquidity requirements for lenders marked a more aggressive policy stance than many had anticipated.

This time the tightening is for real. A key question going forward is how much more appetite for tightening the CBN has, said Razia Khan, head of Africa research at Standard Chartered.

Sanusi reaffirmed his commitment to a stable exchange rate, which has remained in a tight band around 150 naira to the U.S. dollar for more than a year, although he acknowledged this was eating into foreign reserves.

Given the strong statement of intent to keep the FX rate stable, the extent of tightening we see over the course of 2011 will depend in part on risks to the FX rate, and in part on how rapidly we see bank credit growth recovering, Khan said.

The central bank raised rates by 25 basis points to 6.25 percent in September, the first increase in over a year, as it switched attention from boosting growth to battling inflation.

It left the benchmark rate on hold at its last meeting in November but signalled a need for further tightening.

Analysts said Tuesday's decision was expected to lead to a rise in yields on Nigeria's most liquid 3- and 5- year bonds in the short term.

Today's action, though not entirely unexpected by the market, should put some more upward pressure on market yields. It may help stabilise the naira, said Leon Myburgh, sub-Saharan Africa strategist at Citi.

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