Monetary Policy Transmission Channels and Inflation in Nigeria

Despite active use of monetary policy, Nigeria continues to face significant inflationary challenges, suggesting weaknesses in how policy signals are transmitted to the economy. A precise understanding of these transmission channels is critical for effective policymaking. This study investigates the impact of key monetary transmission channels—interest rate, credit, and money supply—on inflation in Nigeria from 1986 to 2023. Using Autoregressive Distributed Lag (ARDL) regression techniques, it analyzes the short-run and long-run dynamics of the monetary policy rate, bank lending rate, treasury bill rate, and broad money supply. The analysis reveals a complex and often counterintuitive transmission process. Notably, an increase in the monetary policy rate is inflationary in both the short and long run. Similarly, the bank lending rate exhibits a positive relationship with inflation. However, a one-period lag of both rates shows a significant negative effect on inflation, indicating potent but delayed disinflationary impacts. Treasury bill rates were found to be ineffective, while growth in broad money supply was consistently inflationary. The findings suggest that the Central Bank of Nigeria (CBN) must account for significant time lags and perverse short-term effects. Key recommendations include: (1) adopting a forward guidance framework to manage expectations and improve policy credibility; (2) implementing interest rate corridors and closer oversight of commercial bank lending practices; (3) expanding long-tenor treasury bill issuance to anchor long-term expectations; and (4) enforcing tighter control over monetary aggregates.