Dear Speculators,
Economic thought is contestable and opinionated but economic fact is definite, you are either right or wrong. For the second consecutive Monetary Policy Committee meeting, we have correctly predicted the outcome of the meeting and correctly called the key interest rate (read up our last post). Still many analysts, including the Nigerian Minister of Finance continue to call for lower rates to salvage the economy from prolonged negative growth. Twice the MPC has ignored them and rightly so. How does the CBN justify low rates in times of high inflation? That's a doltish request!
Numerous Keynesian economists have fallen prey to the interest rate fallacy, believing that low interest rates are accommodative monetary policies that lead to economic growth. On the contrary, Friedman proved that interest rate cuts is indeed a tightening monetary policy which leads to a reduction in the monetary base of a nation. Rather than interest rate cuts leading to economic growth, it is an increase in money supply which expands an economy through an increase in the aggregate demand for goods and services as consumers seek to get rid of the excess liquidity in circulation.
Interest rates are not initiative policies, they do not kick start anything. Rather, fluctuations in the natural rate of interest is simply a response to changes in economic conditions. Interest rates react, it does not seek to preempt future market conditions.
CBN has played all the cards it has to manage the economy and they should be left alone. Monetary policy does not create economic growth, that's the job of productivity growth. Just ask America and Europe if low interest rates have translated to high economic growth. You will want to hear the answer, believe me!
Economic thought is contestable and opinionated but economic fact is definite, you are either right or wrong. For the second consecutive Monetary Policy Committee meeting, we have correctly predicted the outcome of the meeting and correctly called the key interest rate (read up our last post). Still many analysts, including the Nigerian Minister of Finance continue to call for lower rates to salvage the economy from prolonged negative growth. Twice the MPC has ignored them and rightly so. How does the CBN justify low rates in times of high inflation? That's a doltish request!
Numerous Keynesian economists have fallen prey to the interest rate fallacy, believing that low interest rates are accommodative monetary policies that lead to economic growth. On the contrary, Friedman proved that interest rate cuts is indeed a tightening monetary policy which leads to a reduction in the monetary base of a nation. Rather than interest rate cuts leading to economic growth, it is an increase in money supply which expands an economy through an increase in the aggregate demand for goods and services as consumers seek to get rid of the excess liquidity in circulation.
Interest rates are not initiative policies, they do not kick start anything. Rather, fluctuations in the natural rate of interest is simply a response to changes in economic conditions. Interest rates react, it does not seek to preempt future market conditions.
CBN has played all the cards it has to manage the economy and they should be left alone. Monetary policy does not create economic growth, that's the job of productivity growth. Just ask America and Europe if low interest rates have translated to high economic growth. You will want to hear the answer, believe me!
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
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