Nigeria’s Illusion of Using Interest Rates to Control Inflation

I have written that Nigeria must develop a new playbook on how we fight inflation in the country. Yes, our current use of interest rate is suboptimal because it is not working. Some validations on that thesis:

“Under the previous regime of the Central Bank, we have seen a continuous tightening of monetary policy, and the concept of monetary policy tightening is to increase interest rate. Our MPR is at 18.75% if monetary policy tools can tackle inflation, then inflation will have been subdued by now, given all the monetary policy tools and tightening that has taken place over the last two years This economy is not the type of economy where the interest rate can effectively fight inflation” – Director of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf .

“The previous administration of the CBN under the leadership of Godwin Emefiele had consistently increased the interest rate to 18.75% in July as a measure to curb inflation. However, the move seemed counterproductive as inflation rose for the sixth consecutive month in July to 24.08%. As of November, Nigeria’s inflation stands at an 18-year high of 28.2%- marking ten months of consecutive increase.” – Nairametrics

What I have written: “Note that interest rate changes do not affect consumer demand that much in Nigeria since we have a limited consumer lending system. In other words, when we change rates, we are merely affecting companies as they’re really the entities which actually borrow in Nigerian banking. 

“Yes, the irony is that only companies can actually drive production (which boosts Supply) and that is why using the increase of rates to fight inflation in Nigeria has not been effective. Contrast this with say the United States where consumer lending is massive via credit cards, etc. There when rates go up, you influence Demand significantly, making it possible to cool down inflation. Our strategy cannot mirror the US, etc with developed consumer lending because higher rates punish those who are to boost Supply which is vital for us to reduce inflation.”

Simply, I have written that increasing interest rates to fight inflation in Nigeria is a waste of time. Our consumer lending which affects demand is insignificant and that means the interest rate which affects lending is toothless.

The Central Bank of Nigeria must change its strategy. What we do doesn’t make sense. Think of it – we increase the interest rate which is designed to cool down the economy by making capital more expensive,  only for the same apex bank to release trillions of naira to the federal government, via Ways and Means, to flood the economy with cash. At the end, the Ways and Means (like the new N7.3 trillion) will cancel the impact of the interest rate hike. This has been going on for ages!

”BARELY one hour after reading a letter from President Bola Tinubu, requesting for the approval of the the securitisation of the outstanding debit balance of N7.3 trillion Ways and Means from the Central Bank of Nigeria (CBN), the Senate immediately approved it.”

I have written that Nigeria must develop a new playbook on how we fight inflation in the country. Yes, our current use of interest rate is suboptimal because it is not working. Some validations on that thesis:

“Under the previous regime of the Central Bank, we have seen a… pic.twitter.com/THuEYkckbM

— Ndubuisi Ekekwe (@ndekekwe) January 8, 2024

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