Inflation vs Interest Rate Nepal 2026: The Balancing Act
Central banks worldwide manage the delicate balance between inflation and interest rates. In Nepal, the NRB's 8-month data for FY 2025/26 shows this relationship playing out clearly — as inflation rose, interest rates followed.
Monthly Comparison: Inflation vs Rates
| Month | CPI Inflation | Repo Rate | CB Lending Rate | Real Lending Rate |
|---|---|---|---|---|
| Aug 2025 | 1.68% | 4.50% | 7.76% | 6.08% |
| Sep | 1.87% | 4.50% | 7.66% | 5.79% |
| Oct | 1.47% | 4.50% | 7.50% | 6.03% |
| Nov | 1.11% | 4.50% | 7.38% | 6.27% |
| Dec | 1.63% | 4.25% | 7.26% | 5.63% |
| Jan 2026 | 2.42% | 5.00% | 8.69% | 6.27% |
| Feb | 3.25% | 5.00% | 8.55% | 5.30% |
| Mar | 3.62% | 5.00% | 8.40% | 4.78% |
Real lending rate = Nominal lending rate minus CPI inflation
Key Insights
1. Real Rates Are Falling: Despite nominal rate increases, the real lending rate (adjusted for inflation) actually fell from 6.27% (Nov) to 4.78% (Mar). This means inflation is rising faster than NRB can raise rates — borrowing is effectively becoming cheaper in real terms.
2. NRB Responded Late but Firmly: Inflation started accelerating in December (1.63%), but NRB only hiked in January. However, the 75bp hike was substantial and sent a clear tightening signal.
3. Real Deposit Rate Near Zero: With deposits at 4.54% and inflation at 3.62%, the real deposit rate is only +0.92%. Savers are barely earning a positive return after inflation — which could discourage bank savings and push money toward real estate or gold.
What Should NRB Do?
If inflation continues rising (potentially to 4%+), NRB faces a difficult choice:
- Hike further: Protect purchasing power and deposit returns, but risk slowing credit growth and economic activity
- Hold steady: Hope inflation is transitory (seasonal/food-driven), but risk losing credibility if it accelerates
- Cut rates: Extremely unlikely given current inflation trajectory
Conclusion
Nepal's inflation vs interest rate dynamic shows the NRB in reactive mode — raising rates after inflation accelerated. Real lending rates are falling despite nominal hikes, suggesting inflation is outpacing the policy response. If CPI continues toward 4%+, further tightening may be necessary to maintain monetary policy credibility and protect savers from negative real returns.