Afrigather If I had a greenback each time somebody requested why Nigeria’s Central Financial institution retains elevating rates of interest to struggle inflation, I’d be on a yacht within the Maldives and never write a weekly column. The CBN has raised rates of interest 4 instances this yr, but inflation stays at its highest stage in practically three a long time: 34.2%.
The parable: Elevating rates of interest to struggle inflation doesn’t work.
The info: Elevating rates of interest is a financial software to handle inflation. Usually, the best way it really works is that the central financial institution raises the rates of interest for loans. Banks, in flip, elevate the worth you pay to borrow cash from them. The speculation is that when borrowing turns into dearer, it discourages spending and reduces demand for items and providers. Costs will ultimately fall.
“If elevating rates of interest to average inflation actually works, then why does Nigeria’s inflation price maintain accelerating?”
Elevating rates of interest isn’t a magic wand that makes inflation disappear in a single day. When the Financial institution of England (BoE) began elevating charges in December 2021, inflation was 5.4% and rose to 11.1% in October 2022 regardless of sustained hikes in rates of interest. Between December 2021 and August 2023, the BoE raised rates of interest fourteen consecutive instances to a 16-year-high of 5.25%. It held charges till July 2024. The nation’s inflation is now 2%.
On Thursday, August 1, BoE minimize the speed to five%—for the primary time in 4 years. But Governor Andrew Bailey advised BBC the mission wasn’t “completed but.”
Preventing inflation will not be a two-day activity, and the charges won’t all the time translate shortly. The present CBN management began its inflation struggle in February 2024. There’s no fastened timeline for the way lengthy the transmission mechanism takes however Financial institution of Canada estimates between 12 and 18 months. The Financial institution of England says 12 months to 2 years. No surprises there, because it stored charges up for 2 years. CBN governor Olayemi Cardoso expects Nigeria’s inflation to average to 21.4% this yr.
Finally, one factor is obvious: elevating rates of interest to decrease inflation works.
