• Mon. May 29th, 2023

Double-digit Inflation and Increased Interest Rate. What Else Is Nigeria Getting Right?

ByJoel Nwankwo

May 25, 2023

Death, taxes and the CBN increasing the interest rate every time the NBS releases an inflation rate figure. This has become the norm in Nigeria. Nigerians are probably getting used to a strategy that does not work.

The interest rate was increased by the Central Bank of Nigeria (CBN) from 18% to 18.5%. The decision was made public on Wednesday following a meeting of the policy-setting committee at the CBN headquarters in Abuja by Godwin Emefiele, governor of the apex bank.

The central bank will increase the monetary policy rate (MPR), which gauges the interest rate, for the third time in a row as a result of the inflation rate. Emefiele claimed that the group decided to increase the benchmark interest rate in order to reduce inflation.

According to the governor, the committee took into account factors such as the ongoing scarcity of premium motor spirit, often known as gasoline, the 2023 general elections, an ongoing rise in energy prices, pressure from exchange rates, and an ongoing rise in insecurity.

To reduce demand and control inflation, which is at record highs in many nations, central banks are increasing interest rates. Monetary policy must take action because fast price increases are expensive to society and harmful to steady economic growth. Acting here does not require the CBN to succumb to inflationary pressures and make poor decisions.

The act of increasing interest rates with every increase in inflation has proven to lack the ability to combat Nigeria’s increasing prices. Yet the CBN has kept it as its go-to policy to contain inflation. The CBN is definitely not getting something right.

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A Lingering Question

“MPC was of the view that although the inflation rate moderated marginally in December, the economy remained confronted with the risk of high inflation with adverse consequences on the general standards of living,” Emefiele said in announcing the committee’s decision.  Therefore, in order to aggressively continue to rein in inflation, the Committee decided to maintain the current posture of policy at this moment.

“MPC voted to raise the MPR to 17.5%, retain the asymmetric at +100/-700 basis points around the corridor.”

Although the Central Bank of Nigeria is constantly focusing on raising interest rates to combat inflation, the average Nigerian may not be aware of the significance of MPC and MPR and may have a number of unanswered concerns. How would falling rent, food, or gas prices be affected by rising interest rates? Will it not raise costs for everyone who makes loan interest payments? Additionally, won’t it make crucial green investments more challenging?

While making cuts elsewhere or generating more income to lower the total deficit, policymakers have a duty to offer strong protections to those in need.

Some Alternatives to Interest Rate

Nigeria’s growing inflation cannot be controlled by the CBN’s monetary policy alone. It is possible to combat impending inflationary pressures when fiscal adjustment is sustained, ideally through the creation of a fiscal framework that outlines the course of policy over the coming years. The Nigerian government must exercise its discretion to help fight inflation rather than passively watch while central banks increase interest rates.

Increasing government spending is thought to be the source of inflation; however, this is only true when a corrupt or inept government prints money rather than raising taxes to pay for its cronies. Three of Africa’s 19 billionaires are from Nigeria. Wealth can be taxed by the government in addition to income to create more revenue for expenditures.

Furthermore, interest rates are used to cool demand in an economy. It becomes a very powerful tool to contain inflation only when it is demand-pulled inflation. Otherwise, it is useless or less effective.

There is no excessive aggregate demand in Nigeria; real personal consumption has not risen, and no sector in the country is facing a wage-price spiral at the moment. With all these factors, there is really no justification to raise the interest rate.

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Joel Nwankwo

Nnamdi Joel is a tech journalist. He is passionate about telling stories as it relates to Africa's social and financial tech advancements. You can reach him at joel.nwankwo@techeconomy.ng

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