Imagine you are in a car, driving down a long, winding road with no clear destination. The road ahead is riddled with bumps, sharp turns, and potholes, making every mile a test of endurance. For Nigerians, this journey mirrors their unending battle with inflation—the ever rising costs of things that make life an uphill struggle.
The Central Bank of Nigeria (CBN) has been behind the wheel, attempting to steer us safely through this uncertain terrain. This week, they pressed the accelerator again,ÂraisingÂthe benchmark interest rate to 27.5% to regain control over rising inflation.
Why did CBN increase the rate again?
CBN Governor Yemi Cardoso announced that the Monetary Policy Committee (MPC) unanimously agreed toÂhikeÂinterest rates. The decision comes as inflation continues its relentless climb—not just year-on-year, but month-on-month as well. In October, inflation soared to 33.9%, a level not seen since 1996.
This price surge is mainly due to rising costs of food and fuel, coupled with a depreciating naira, which together are straining household budgets and squeezing business operations for many Nigerians.
At the same time, the naira has struggled this year, losingÂ46%Âof its value against the dollar. This depreciation comes from efforts to let the currency float freely and address the ongoing dollar shortage. As a result, the cost of imports has soared, adding to Nigeria’s inflation problems.
But they have been increasing rates. Why is inflation still going up?
Despite the CBN’s repeated interest rate hikes, inflation in Nigeria continues to rise, and the naira remains under pressure. This raises a pressing question:Âwhy isn’t it working?
Raising interest rates is a classic tool for controlling inflation, but it’s only one piece of a larger puzzle. By making borrowing costlier, the CBN aims to reduce spending and cool demand. However, Nigeria’s inflation is deeply rooted in structural problems that extend far beyond consumer behavior—problems that interest rate hikes alone can’t fix.
The core problem isÂsupply-side inflation, which is driving up the cost of living, particularly in essential areas like food and fuel. Much of Nigeria’s inflation is tied to rising food prices, which continue to climb sharply. Food inflation is particularly severe in urban areas, where supply chains are under more strain due to higher transportation costs and challenges in food preservation. As food gets more expensive in cities, the burden on consumers grows heavier.
To truly tackle inflation, the CBN’s monetary policy must work hand-in-hand with solutions targeting these underlying challenges. Key issues like the high cost of production—caused by a weakened naira, soaring fuel prices, and poor infrastructure—are making it more expensive for businesses to produce and transport goods. These structural problems cannot be solved by interest rate hikes alone, underscoring the need for broader, more comprehensive reforms.
What does this mean for you?
For most Nigerians, this means that the cost of living will remain high for the foreseeable future. With interest rates increasing, borrowing costs will increase, making loans and credit more expensive. While higher interest rates can lead to better returns on savings, inflation is still outpacing the benefits. This means the naira in your pocket is losing its purchasing power daily, especially for food and fuel.
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