If I had a dollar every time someone asked why Nigerias Central Bank keeps raising interest rates to fight inflation, Id be on a yacht in the Maldives and not write a weekly column. The CBN has raised interest rates four times this year, yet inflation remains at its highest level in nearly three decades: 34.2%.
The myth:Raising interest rates to fight inflation doesnt work.
The facts:Raising interest rates is a monetary tool to manage inflation. Generally, the way it works is that the central bank raises the interest rates for loans. Banks, in turn, raise the price you pay to borrow money from them. The theory is that when borrowing becomes more expensive, it discourages spending and reduces demand for goods and services. Prices will eventually fall.
If raising interest rates to moderate inflation really works, then why does Nigerias inflation rate keep accelerating?
Raising interest rates isnt a magic wand that makes inflation disappear overnight. When the Bank of England (BoE) started raising rates in December 2021, inflation was 5.4% and rose to 11.1% in October 2022 despite sustained hikes in interest rates. Between December 2021 and August 2023, the BoE raised interest rates fourteen consecutive times to a 16-year-high of 5.25%. It held rates until July 2024. The countrys inflation is now 2%.
