Fighting inflation is a huge sacrifice, detrimental to output – Rewane

Hawkish stand by the Nigerian central bank and others, globally, may be a futile exercise as it has a huge potential of reducing output by as much as 3.4 per cent, a monthly publication by Bismarck Rewane’s Financial Derivatives Company (FDC) Limited has said.

According to the Chief Operating Officer of FDC, a study conducted said, “while some central banks have been criticized for recognizing the inflation problem to late, and that even the earlier rate hikes would have been futile”.

It argued further that. “more hawkish policy would have lowered inflation by one percentage point at the cost of reducing output by 3.4 percentage points, Reuters quoted the authors.”

Analysts say, this is quite a large sacrifice ratio, and that to control inflation, fiscal policy must work in tandem with monetary policy and reassure people that instead of inflating away debt, the government would raise taxes or cut expenditure.

It said, central banks are now raising interest rates, but the new study, presented on Saturday argued that a central bank’s inflation-fighting reputation is not decisive in such a scenario.

“If the monetary tightening is not supported by the expectation of appreciate of appropriate fiscl adjustments, the deterioration and fiscal imbalances leads to even higher inflationary pressure,”.

The Central Bank of Nigeria (CBN) recently raised its benchmark interest rate, known as Monetary Policy Rate (MPR), to 15.5 percent, the third straight hike this year.

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