Sierra Leone-Economy-Research

S/Leone: the link between interest rate and inflation?

APA-Freetown-(Sierra Leone)

Bank of Sierra Leone (BSL) raised the Monetary Policy Rate (MPR) by 0.75 percent in April this year.

 The Bank announced the increase in interest rate in a press release dated April 5, 2022. According to the press release, the new monetary policy is part of the Central Bank’s effort to hold down the rate of inflation.

The assumption that an increase in interest rate or reduction in money supply might keep inflation under control is not limited to Sierra Leone. Like Sierra Leone, many other countries including UK and US have introduced tight monetary policies to combat sharp increase in prices of goods and services and mitigate the negative impact of COVID-19, Russia-Ukraine war and the global energy crisis on the world economy.

However, some economic experts are wondering how much influence interest rate has over inflation in Sierra Leone, especially when data is very limited. In a linear regression model, interest rate and inflation rate recorded monthly from January 2012 to December 2021 by BSL and Statistics Sierra Leone respectively suggest that interest rate (X) has almost no influence over inflation rate (Y) . Please see attached photo for the linear regression model.

In other words, the findings concerning the 10 years or 120 months observed (from January 2012 to December 2021) reject the hypothesis that an increase in interest rate might control inflation. On the contrary, 1 percent increase in interest rate increases inflation by 0.3 percent (????1), according to the findings. 

For example, the year-on-year inflation rate has increased from 22.44 percent in April 2022 when the Bank increased interest rate to 29.47 percent in July 2022, making the prices of goods and services including basic food commodities such as the staple rice go through the roof.

This suggest that Sierra Leone will have to employ innovative research methodologies in all sectors of the economy, including agriculture, mining, manufacturing, construction and service to acquire thorough understanding on how to effectively curb inflation. 


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