Raising Interest Rates to Bring Down Inflation
By Ijezie Ebuka
The day started in Asia with the Indonesian and Philippines Central Banks raising interest rates by 50 basis points. The Norway Central Bank followed by also raising its rate by 50 basis points from 1.75% to 2.25% and said the rate would also be most likely increased again in November as the inflation rate is above its 2% target.
The Bank of England then increased the interest rate by 50 basis points as the UK’s inflation rate in August was 9.9%, way ahead of the bank’s 2% target. The hike was the seventh consecutive increase and the highest since 2008.
The last country in Europe with a negative policy rate, Switzerland also increased the interest rate by 75 basis points, just as the Federal Reserve did for the third consecutive time on Wednesday, September 22.
The Brazilian Central Bank, on the other hand, kept its benchmark unchanged at 13.75% after 12 straight hikes. Another Central bank that kept the rate unchanged is the Bank of Japan. It stuck with a low-interest rate despite a consumer inflation rate of 2.8% in August and said it would keep it that way in the near future to encourage economic recovery. It also confirmed that it would intervene in the foreign exchange market to defend against the fall of the Yen.
The shock of the day was Turkey cutting its interest rate by 100 basis points from 13 to 12% despite an 80% inflation rate in August.
Economists at CitiGroup issued a report on Wednesday that, “The rhetoric and action of major central banks are demonstrating greater resolve to fighting inflation, increasingly willing to sacrifice economic growth to achieve this.”
Persistent inflation around the world means central banks around the world may continue to increase interest rates in the near future.
Next week, the Central Bank of Nigeria (CBN) will meet to decide which way to go. At its last meeting, the benchmark rate was raised from 13% to 14%.
It is always believed that when interest rates are high, the cost of borrowing goes up, forcing consumers to reduce their spending, bringing about a decline in the demand for goods, and resulting in a fall in prices. When the prices of goods go down, inflation eases.