The International Monetary Fund (IMF) has cautioned central banks against aggressive interest rate hikes in their effort to tame rising inflation.
The Washington-based lender advised in a document titled, ‘Global Inflationary Episode Offers Lessons for Monetary Policy’.
The IMF noted that recent global inflation was driven by major changes in demand across sectors, supply disruptions, and unusually high levels of government and central bank spending.
As of August 2024, many central banks have not yet cut interest rates.
In Nigeria, the central bank raised the interest rate by 50 basis points to 27.25 per cent in September. For the first time in 17 years, the Bank of Japan (BOJ) increased its key interest rate from -0.1 per cent to a range of 0 per cent-0.1 per cent.
In Nigeria, experts have criticised CBN’s monetary tightening as it has failed to moderate inflation which was 32.7 per cent in September.
However, the IMF disclosed that several central banks plan to review their policy frameworks in the coming months.
IMF said, “When bottlenecks are confined to specific sectors with relatively flexible prices, such as commodities, we are reminded of an old lesson: the common practice of focusing monetary policy on core inflation measures remains appropriate.
“Excessive policy tightening in such cases can be counterproductive, leading to costly economic contraction and resource misallocation.
“Given these insights, central bank monetary policy frameworks should identify the conditions under which front-loaded tightening is appropriate.”
The IMF said it requires enhanced models and better sectoral data to gauge underlying inflationary forces, improve forecasts, and guide the fine-tuning of policy responses.
IMF said, “A first step in the right direction may involve collecting more frequent data for prices by sector and supply constraints to determine if key sectors are bumping against supply bottlenecks.
“Understanding structural factors such as how different sectors set prices and the links between them would provide additional valuable insights.”