Should the CBN increase interest rates in Nigeria?

May 31, 2022|Michael Famoroti

We are entering a new economic era.

A few weeks ago, we flagged how historically high inflation in the United States and other developed countries is affecting the global economy. After the last global recession (2007 – 2009), central banks in the developed world took centre stage, pursuing a complex and innovative quantitative easing (QE) policy to reflate the global economy.

Key takeaways

We are in a new dispensation of monetary policy, and Nigeria is not exempt. After the CBN pursued a relatively low-interest rate regime for over five years, it finally increased its anchor rate (MPR) to 13% to curb inflationary pressures in the country.
The change in interest rates is significant to the Nigerian economy because they determine the direction of several indicators, including savings, borrowing costs, consumer disposable income, investment inflows and GDP growth.
But the ability of the rate hike to reflate the economy depends on the type of inflation Nigeria is experiencing today—cost-push inflation.
In the end, whether or not the rate increase ultimately curbs inflation in the short term, the CBN’s signalled intent to fight inflation is a good and legitimate sign that will shape investor behaviour and inflation expectations in the foreseeable future.

By and large, QE worked. The global economy picked up again, notwithstanding ad hoc shocks like the pandemic and Brexit, and QE never led to rapid inflation as previously feared. In fact, for nigh on a decade, the global economy enjoyed a period of ultra-low inflation, even with central banks flooding financial markets with trillions of dollars of new money.