A couple of days ago, the Central Bank of Nigeria (CBN) made its first decision of the year. It raised its monetary policy rate (MPR), which benchmarks interest rates, by 100 basis points (bps) to 17.5%. That was the fifth rate hike in a row, and the current number is Nigeria’s highest in over two decades.

It’s unusual for Nigeria’s Monetary Policy Committee to start the year with a rate hike. The trend is usually to keep rates unchanged at inaugural meetings. It’s the first time since 2014 that the MPC is starting the year with a hike. Yet, this one is no surprise.

Nigeria’s inflation rose for ten consecutive months in 2022 and only recently eased to 21.34% from 21.47%. That’s not much of a difference and doesn’t bring relief to residents. More so, the naira isn’t getting any stronger against the dollar. So there’s an obvious need for some form of intervention. However, the CBN’s fifth attempt at taming inflation and increasing investment flows, like the others, might not work.

The idea behind increasing interest rates is to incentivise savers/investors to hold on to the naira instead of spending excess income. That way, it can tame the country’s money supply and bring down inflation.

Notably, the CBN’s approach to inflation aligns with global central banks, which grappled with record-high inflation in 2022. For instance, the US, which experienced its highest inflation in 40 years last year, recorded the sixth consecutive decline in its annual consumer price index (CPI) in December, prompting the Fed to consider increasing interest rates at a slower pace this year. In the UK, inflation dropped to 10.6% for the second consecutive month, bringing about a sense of relief. But that didn’t stop the Bank of England (BoE) from raising its benchmark interest rates in December to 3.5% (the highest in 14 years), with signals for further hikes in 2023.

But the problem with this approach is that Nigeria’s inflation problem is beyond having excess cash in circulation. In fact, Nigeria’s current inflation might be too big for the CBN to handle.

For instance, the country is going through its third month of fuel scarcity crisis. That alone is driving prices higher across markets. And since 92 million Nigerians have no access to electricity, energy spending has spiked since last year. More so, now that Nigeria is getting more serious about removing subsidies, fuel prices are not going down in the short term.

Another instance is that insecurity is one of the primary drivers of Nigeria’s food inflation. And even though the CBN has tried to intervene in the country’s agricultural sector, it hasn’t moved the needle. Besides, Nigeria’s agricultural sector has not recovered from the flooding crisis of last year, which depleted the country’s food supply.

It also matters that the Central Bank of Nigeria has (probably inadvertently) played a key role in the country’s inflation woes. Today, President Muhammadu Buhari and the senate are locked in a clash of wills over what becomes of about N23.72tn ($53bn) of loans that the central bank has extended to the government in recent years through a facility called “Ways and Means Advances.” That amount is a wide breach of the legal threshold (5 per cent of the previous year’s actual revenue of the Federal Government). So if there’s excessive money supply today, it’s partially because the CBN’s excess printing.

The CBN also takes a chunk of the blame for Nigeria’s dollar scarcity. In recent years, it has unleashed several anti-dollar policies, aiming to defend the naira. For instance, last year, it asked banks to limit dollar spending on naira cards to $20 monthly. But since Nigeria is still very import dependent, people still had to find alternative means of getting the greenback. And that has widened the margin between rates at the official and parallel markets.

Whichever way we look at it, it is commmendable that the CBN is attempting to deflate the economy. But the sad truth is that this measure won’t suffice. And so, the country will deal with higher inflation and interest rates concurrently. That means consumer wallets will shrink while businesses will struggle to borrow money. It’s no surprise that the World Bank exempted the country from its optimistic forecast on West Africa.