The International Monetary Fund (IMF) has advised central banks to be cautious with aggressive interest rate increases in their fight against rising inflation.
The warning came in a report titled ‘Global Inflationary Episode Offers Lessons for Monetary Policy’, which highlights the risks of excessive monetary tightening.
According to the IMF, recent inflation has been driven by shifts in demand, supply chain disruptions, and unusually high levels of government and central bank spending.
As of August 2024, many central banks around the world have not yet lowered their interest rates.
In Nigeria, the central bank raised its interest rate by 50 basis points to 27.25% in September, though inflation remained high at 32.7% that month. Meanwhile, the Bank of Japan increased its key interest rate for the first time in 17 years, raising it from -0.1% to a range between 0% and 0.1%.
Critics in Nigeria have argued that the central bank’s tightening measures have failed to control inflation effectively.
The IMF, however, noted that many central banks are reviewing their monetary policy frameworks in response to evolving economic conditions.
The IMF emphasized that focusing on core inflation—excluding volatile sectors like commodities—remains essential. It cautioned that overly aggressive tightening could harm economies, causing unnecessary contraction and misallocation of resources. Instead, the IMF called for better data collection on sectoral prices and supply bottlenecks to improve inflation forecasts and fine-tune policy responses.
Several central banks are expected to reassess their strategies in the coming months.