What if the CBN Reduces Interest Rate?

The governor of the Central Bank of Nigeria (CBN) recently announced an increase in the Monetary Policy Rate (MPR) to 22.75% from 18.75%. The goal according to members of the committee is to stem the increasing inflation rate that currently stands at 29.9%. This move aims to reduce the amount of money in circulation, which is often attributed to inflation. By increasing the interest rate, depositors are encouraged to put (save) their money in the bank for higher returns. On the other hand, borrowers have to pay more to get loans. Basically, this kills two birds with one stone while addressing one problem - inflation.

It is worth noting that inflation is defined as "a general increase in prices and fall in the purchasing value of money." You also want to know that inflation can be either cost-push or demand-pull. Demand-pull stems from increase in demand from consumers, usually due to more money in circulation/increased purchasing power, which leads to suppliers increasing the prices of goods. However, cost-push inflation is a result of increase in the cost of production. With the definition and "types" of inflation, I make bold to state that the MPC has again made another possible blunder and only playing to the gallery of the western world and Western-centric policies.

First of, there is not enough more in the hands of the people, in fact, Nigerians are witnessing probably the worst times in terms of their purchasing power. So how does an increase in interest rate help to rescue the situation? Secondly, the inflation here is cost-push resulting from FX issues and subsidy removal. Therefore, increasing the cost of borrowing for businesses will only make it even more difficult and costlier for organizations to operate, leading to further increase in their cost of operations. Thirdly, the policies as implemented by the CBN are designed for the Western world where the credit system works effectively. Until Nigeria and Africa by extension, develop localized policies and ways of managing the economy, we will always be behind the West. Remember, it is a global competition.

With my little sense, I would think policies to improve the purchasing power of the people and encourage businesses to employ more will have been a better approach. The worst that should have been done by the MPC was to maintain the interest rate at its previous level. 

But what do I even know sef.

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