Economy

IMF Warns Central Banks Against Aggressive Rate Hike

IMF Warns Central Banks Against Aggressive Rate Hike
  • PublishedOctober 16, 2024

The International Monetary Fund (IMF) has issued a warning to central banks, including Nigeria’s Central Bank (CBN), to avoid aggressive interest rate hikes in their efforts to combat rising inflation.

The IMF noted that recent global inflation is largely driven by changes in demand, supply disruptions, and high government and central bank spending. In a document titled “Global Inflationary Episode Offers Lessons for Monetary Policy,” the IMF cautioned:

“When bottlenecks are confined to specific sectors with relatively flexible prices, such as commodities, we are reminded of an old lesson: the common practice of focusing monetary policy on core inflation measures remains appropriate.

“Excessive policy tightening in such cases can be counterproductive, leading to costly economic contraction and resource misallocation.

“Given these insights, central bank monetary policy frameworks should identify the conditions under which front-loaded tightening is appropriate.”

READ: Fuel Subsidy To Gulp N8.43trn If Reintroduced – IMF 

In Nigeria, the CBN raised interest rates by 50 basis points to 27.25% in September, despite criticism from experts that this monetary tightening has failed to moderate inflation, which reached 32.7% in September.

The IMF further emphasized the need for enhanced models and better sectoral data to gauge underlying inflationary forces, improve forecasts, and guide policy responses.

“A first step in the right direction may involve collecting more frequent data for prices by sector and supply constraints to determine if key sectors are bumping against supply bottlenecks.

“Understanding structural factors such as how different sectors set prices and the links between them would provide additional valuable insights.”

By heeding the IMF’s warning, central banks can strike a balance between controlling inflation and promoting economic growth.

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