Rising interest rates cause inflation, and this is basically an economic phenomenon. But what does it mean for the economy? Inflationary pressures are likely to increase as the “hawks” in the Federal Reserve (Fed) continue to raise their interest rate forecasts, according to the latest minutes of their most recent meeting.
It’s unclear whether this will be enough to fuel another round of inflation. The Fed raised its benchmark overnight loan rate by a quarter of a percentage point last month, and many economists expect that it will raise rates again at its next meeting on Wednesday.
Take Away:
- The Central Bank’s governor is aggressive on the inflation crisis.
- The deposits of those who put money in the bank would represent the people’s deposits.
- Pause lending: dual action on the monetary policy rate and the tax pro rata ratio.
Inflation is a serious issue in the world today. As economies expand and populations increase, goods, services, and assets are more users. The cost of producing goods and providing services must grow commensurately to meet demand. If this occurs too quickly, then inflation results, and the economy suffers from higher prices for goods and services.
Demand-pull inflation comes about when profit opportunities are rising, but the supply of inputs does not increase at the same pace. Cost-push inflation comes about when information such as labour is plentiful, but other factors may also be causing price increases.
Governments can avoid problems like this by adjusting aggregate demand and supply conditions over time by changing interest rates or currency exchange rates, thus smoothing out fluctuations that may occur from year-to-month or month to month.
Mr. Chika Mbonu gave an analysis of the Global Business Report on Arise TV presented by Mr. Aruoture Oddiri.
Good afternoon, Mr. Chika Ebonu.
Chika: Yes, good afternoon.
Aruoture Oddiri: You did predict that there would be a rate, but you said 50 basic points.
How Does Raising Interest Rates Affect Inflation?
Chika: Well, nothing to do. Because everybody knows it’s going to go up, and the truth is that… sigh… If you see the picture of the Bank of England’s Andrew Bailey recently, he looks stressed. Presently, every country’s central bank governor is like this: the funniest thing is Liz Truss, who is constantly complaining that he is sleeping on the job.
I thought the federal government of Nigeria CBN governor didn’t want to have the same accusation that they let the horse out of the stable or that he was sleeping on the job, so he went aggressive, which is what Truss had been expecting or wanted to happen. You see, the thing about knowing when you do something, and everybody will say, “Why didn’t you do it a year ago?”
What Causes Interest Rates to Rise?
Look at the background. Do you know what happened during the COVID era in 2020? You know that Russia shut down, and the supply chain shut down. People were at home, and most governments were trying to reflect on their economy, which many called quantitative easing.
The government started printing money and putting it in the hands of people, so we have a lot of people who have cash, but there was no production, so the quantity of goods that this cash would check in was the same. And so it went on in 2020 and 2021, with even the UK government joining in. Truss has said they should have stopped it last year, so it has a lot of money chasing to feel good and with the suspension of COVID or COVID TESRA train.
The economy has not caught up, and the growth has not caught up. Look at the airlines. For example, many airlines are cancelling flights worldwide because of a scarcity of pilots and aviation staff. The problem is that it’s a worldwide phenomenon, and based on that, we said that Nigeria would not be exempt. In the UK, for example, inflation was at 9.9% (40er high, where the exchange rate was about 2.5% ) and we are here crying for our own.
Therefore, you’ll see that our own inflation is almost a runaway at 20.52%, so they needed to do something to put inflation back. And that’s why they went aggressive.
Interest Rate Increase 2022
Remember what I said here about what the CBN does? What suit do they have? Money supply, managing money supply, every other thing revolves around that, and the quality of money they manage is in the banking system because the efficacy of this tool in Nigeria is very low because there’s a lot of informalities in the banking system. A lot of people have money under their beds. You know, a lot of Naira under their beds. A lot of people have converted Naira into dollars, also.
So you find that CBN decided to do something aggressive, so the treasure doesn’t get run away. Inflation reached a point of 2.5%, while the previous money proceeded, which is a lead rent under, was at 14%. For our readers and viewers, that is like a negative interest rate, which means if you have money at this time 1 and you hold it till time 2, the value will have been reduced by the inflation factor, which is about 20.52.
For it to be positive interest, the interest rate must be higher than the inflation rate. Otherwise, you are operating in a real negative interest rate regime, which is what many people are doing.
What Are The Major Objective of Inflation?
The goal is to close the gap between the inflation rate, which is at 25 and the monetary proceeds, which is at 14, before moving aggressively by 150 basis points, or 1.5% on top of 14, to make it 15.5%. The impact of that includes the fact that:
- There is a base rate in the economy, so it is expected that the deposits of those who put money in the bank would represent people’s deposits. The savings account about 30% wimpier would move to 4.6 something.
- I spoke to the treasurers. They said we should forget about lending because they need to reset and check the impact of everything because of the crumble of the dual action on the monetary policy rate and the tax pro-rate ratio.
- All these impacts the lending rate, so all borrowers should expect that interest rates will go up, which impacts borrowing costs. Our readers and viewers should know that if you borrow from a bank, the borrowing enterprise will go up.
As a result, the theory that we hear the CBN Governor discuss is that raising interest rates discourages borrowing and reduces the quantity of money available; lowering the quantity of money available reduces the pressure on foreign exchange.
