This is evidently caused by a reduction in aggregate supply. To answer this question, It is important for us to take a moment to understand the nature of the inflation facing us. However, will raising interest rates save Nigeria at this point? It is therefore clear why the go-to monetary policy for most central banks in the face of inflation is to increase rates. This is another way that rates increase reduces the supply of money in the system, thus reducing inflation. Increased rates also makes lending more expensive, thus discouraging borrowing in the economy.
This reduces demand, and prices start to come down. The resultant effect is that we have less money chasing the supply of goods. Increase in savings mops up the excess cash (liquidity) in the system. Based on this, one can say that reducing the amount of money chasing these goods would reduce inflation.Īn increment in interest rates encourages savings. Inflation occurs when there is too much money chasing few goods. To answer this question, lets first of all undertand how increased rates help to stem the tides of inflation: Should the Central Bank Keep Increasing Interest Rates to Tackle Inflation?Īs the MPC meets today to review the nation's monetary policy, the question is: should we continue to raise interest rates to tackle inflation?
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