Nigeria’s inflation conundrum: How high interest rates fuel price hikes

A tight monetary policy stance, aimed at curbing inflation, has instead exacerbated the problem, as high interest rates increase production costs and hinder economic growth. Over 15 months, from July 2023 to September 2024, the Central Bank of Nigeria raised its Monetary Policy Rate by nine percentage points or 900 basis points. Meeting after meeting, members […]

A tight monetary policy stance, aimed at curbing inflation, has instead exacerbated the problem, as high interest rates increase production costs and hinder economic growth.

Over 15 months, from July 2023 to September 2024, the Central Bank of Nigeria raised its Monetary Policy Rate by nine percentage points or 900 basis points. Meeting after meeting, members of the committee voted to raise the interest rate to the banks, from 18.5 per cent to 27.5 per cent. The reason: the central bank, in pursuit of its core mandate to maintain price stability in the economy, pursued a tight monetary policy to fight inflation.

The fight against inflation became imperative early in the life of the new administration following the adjustments in the prices of key economic variables in the economy: the price of petrol concerning the subsidy, and the deregulation of the foreign exchange market concerning the exchange rate or the price of our naira. Both adjustments, which form the core of the ongoing economic reform of the government, produced inflation-inducing impulses from which the economy is yet to recover.

This explains in part the inability of the tight monetary policy stance to restrain inflation. Thus, despite the increase in interest rates, in the classical hope that it would cut the money supply and thereby remove the support feeding inflation, this hardly happened. Instead, inflation ran parallel to the interest rate curve. From 24.08 in July 2023, it rose to 34.19 per cent in June 2024, one year after the hiking spree. But it wasn’t done yet. After a bit of softening, it took off again, until it reached a peak of 34.8 per cent to round off the year in December.

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At each meeting, the Monetary Policy Committee (MPC) defended its decision to raise the interest rate with reference to the continuing inflationary pressure. There was evidence of satisfaction with a job well done by the members, for in their view, the inflationary trend would have been far worse without the continued increase in the cost of capital.

Granted that the use of higher interest rates was also aimed at curbing illicit activities going on in the forex market, it is quite debatable whether the hike was indeed the best line of action. The presumed efficacy of the interest-rate fight against inflation is borne out of the assumption that inflation is necessarily a monetary phenomenon.

Several factors have since weakened this assumption, especially concerning our environment replete with countervailing forces that easily neutralise the interest rate model of inflation fight. If an economy has deep-seated structural issues, such as inadequate infrastructure or inefficient markets, interest rate changes alone may not be sufficient to drive economic growth or control inflation.

Therefore, it is quite difficult to accept that inflation could have gotten worse without the 900-basis-point hike. To validate this claim, we need statistical analyses showing the disaggregated impacts, interest rate, and other variables as causative factors in the price movements.

In an economy filled with supply-side hiccups and disruptions, the CBN went on hiking interest rates as if it had solutions to all the challenges we face as a nation. Interest rate changes are unable to address our supply-side issues, such as production costs or supply chain disruptions. In our case, these are the major drivers of the current inflation that is ravaging the economy.

Against them, interest rate hikes have no impact whatsoever. Supply-side disorders have a stranglehold on this economy and must be addressed. Even the central bank identified these in the June edition of its BUSINESS EXPECTATIONS SURVEY REPORT, a publication of its Statistics Department, in the Economic Policy Directorate.

Respondents to the survey identified high interest rates (75.6%), insecurity (75.2%), and insufficient power supply (74.3%) as the top three business constraints in June 2025, highlighting concerns around factors that directly impact operational stability and profitability, according to the report.

This is clear. High interest rates are today an explanatory factor in any equation examining the dynamics of inflation in the Nigerian economy. With MPR at 27.5 per cent, businesses are borrowing at much higher rates, which become part of the production costs. Higher production costs must necessarily translate into higher prices, which are then passed on to consumers.

These factors are responsible for the revelation from the same survey by the CBN that average capacity utilisation across the sectors stood at 58.2 per cent in June 2025. This, according to the report, showed a “slight decrease from 58.7 per cent recorded in May 2025,’ it said.

It is impossible to achieve lower production costs with such low-capacity utilisation in an economy. The MPC confirmed its hawkish stance at the end of its latest meeting, which ended 15 days ago, on July 22. Against some analysts’ predictions that the committee would cut the rate by as low as 50 basis points, it stuck with its hold position, leaving the MPR at 27