(Bloomberg) -- Nigeria’s central bank increased the key interest rate to the highest level since it was adopted in 2006 and plans to extend monetary tightening to contain inflation and bolster the differential that makes local assets attractive to foreign investors.

The monetary policy committee raised the benchmark rate for a sixth straight meeting to 18% from 17.5% on Tuesday. That was the smallest increase in its current tightening cycle.

The MPC has lifted the benchmark by 650 basis points since May to temper an inflation rate that’s been at more than double the top end of its 6% to 9% target for nine months. 

It’s also sought to narrow the gap between the two to improve market sentiment in Africa’s largest economy.

“We plan to continue to tighten, albeit moderately,” until the differential between the two rates is closed, Governor Godwin Emefiele, said in Abuja, the capital. 

The increase means the gap between inflation and the policy rate is now at 390 basis points.

Of the 12 MPC members who attended the meeting, 10 voted for a 50 basis-point hike, one favored a 25 basis-point increase and the rest supported no change. That was the first time in six meetings the decision to hike wasn’t unanimous. 

Market Sentiment

Nigeria has been one of the African markets affected by a sustained selloff of their debt as deepening concerns over the global financial system prompted investors to cut risk in a region brimming with distressed credits.

Read: African Dollar Bonds Sink Amid Worst Bear Siege in 7 Years 

After a sharp selloff in Nigeria’s dollar bonds in the past six trading days, the yield on securities due 2029 and 2051 recovered about 40 basis points at 4 p.m. Lagos time.  

Banking System

Nigeria’s own financial system remains resilient despite the global banking turmoil due largely to stringent prudential guidelines put in place by the central bank, Emefiele said. The approach has led to a strong buildup of reserves, he said. 

The MPC projects the economy of Africa’s most populous nation, where almost two-thirds of the population live on less than $2 a day, will expand 3% this year, compared with 2.9% forecast at its previous meeting, the governor said. 

That’s even as economic growth in the first quarter is likely to be crimped by the central bank’s chaotic rollout of a plan to replace old naira notes. 

The central bank’s program resulted in cash shortages that may have reduced the nation’s 198 trillion-naira ($430 billion) nominal gross domestic product by 7.6% in the first quarter, Yemi Kale, KPMG Nigeria chief economist and a former statistician-general, said on Twitter last week.

--With assistance from Arijit Ghosh, Yinka Ibukun and Emele Onu.

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