The Delusion of Interest Rate Orthodoxy: Are Central Banks Gambling with Aggregate Demand?

Dr Foday Joof, a sustainable finance and economist, raised serious concerns about the continued reliance on interest rate as a tool for fighting inflation in The Gambia and other developing countries.

In an exclusive interview with The Voice at the weekend, Dr. Joof describes the approach as 'counter-intuitive' to the structural realities facing most African economies. 

“Our policymakers are treating imported inflation with a domestic cure that doesn’t work,” Dr. Joof stated. “Raising interest rates in a fragile, import-dependent economy like The Gambia is like fighting a house fire with a bottle of water; it may look like action, but it achieves nothing.”

Dr. Joof argued that many African central banks, including The Gambia’s, are blindly mimicking the policy frameworks of advanced economies such as the United States and the European Union, stating that those economies rely on interest rate adjustments because their inflation is largely driven by overheating demand, credit expansion, and cyclical factors. But this, he stressed, is not the case in The Gambia.

“Inflation here is structural, not cyclical,” Dr. Joof explained. “It is driven by exchange rate volatility, supply-side bottlenecks, high import bills, institutional rigidities, and climate-induced shocks to agriculture—not by excessive consumer spending or credit."

He noted that, on average, over 80% of household income in The Gambia is spent on food and rent, with a significant portion of food items imported. As such, raising interest rates has a minimal impact on curbing inflation but has significant consequences on livelihoods and businesses.

"What demand are we trying to suppress? He questioned. He stressed that Gambians are not borrowing to spree on luxury cars and houses; they’re struggling to buy bread and rice, adding that when these central banks increase interest rates, they are not cooling demand but rather choking economic activities.

Dr. Joof further describes the ongoing reliance on interest rates as a form of economic gambling. He said what Africans are witnessing is that the central banks gambling with aggregate demand. They're betting that by making money more expensive, inflation will fall. Instead, they’re pushing the private sector into paralysis, increasing the cost of public debt, and worsening poverty.

Maintaining his argument, Dr. Joof said the interest rate model assumes the existence of strong financial transmission mechanisms, something many developing economies do not have. In countries with shallow capital markets, low credit penetration, and weak productive bases, this textbook model falls apart.

“We are using tools built for economies with industrial depth, diversified production, and efficient financial systems,” Dr. Joof stated. 

Dr. Joof calls for a shift toward development-oriented central banking through the establishment of special purpose vehicles and investment banks.

He argued that central banks in developing economies should support national priorities such as food security and job creation rather than focusing narrowly on inflation or monetary targeting.

“Let’s stop pretending we’re the Federal Reserve,” he cautioned. “Our central banks should be instruments of development and not gatekeepers of imported orthodoxy.”

Dr. Joof also stressed the need to resist institutional pressures that push African countries to adopt foreign monetary frameworks without adaptation. 

Further, he calls for bold and pragmatic reforms that prioritize home-grown strategies over borrowed models.

“The goal is not to be sophisticated by Western standards,” he said. “Sophistication is understanding your own economy, its people, challenges, and potential; and designing policies that work. We need a policy rethink.”