The World Bank has joined the postulation that Nigeria’s central bank is wasting time by thinking that it could tame inflation through an interest rate hike: “The World Bank has cast doubt on the Central Bank of Nigeria’s (CBN) recent monetary policy measures, suggesting that they may not effectively curb inflation as anticipated by analysts..Despite an aggressive increase in interest rates by a combined 750 basis points since the beginning of the year, inflation remains a persistent issue…”
I have been shouting and the World Bank’s observation mirrors my point; I wrote last year: “I call on the apex bank to also do something new: instead of raising rates to lower inflation in Nigeria, lower interest rates to boost production and supply. I guarantee you that if you lower interest rates in Nigeria, you will improve the Supply side in the market, and if that happens, inflation will drop. Our inflation is driven by low supply, and when we raise rates, we reduce supply [higher productive cost depresses supply] even though the policy has no impact on Demand since our consumer lending is largely nonexistent.
“If you cannot try it across Nigeria, use Ovim, and you will see how inflation will drop in Oriendu Market, Ovim, Abia State.”
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Good People, rate hike works in America/Europe where there is a developed consumer credit system. In Nigeria, we use “cash”, and rate hikes have limited impacts on demand (consumer spending). What rate hikes do in Nigeria is to increase cost of production (via higher interest rates on bank loans) which ends up reducing Supply of goods, with the unfortunate impact of pushing inflation higher.
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