1.0 Introduction
Nigeria’s inflation rate stood at 15.38% in March 2026, reflecting recent monetary policy actions by the Central Bank of Nigeria (CBN) as well as the rebasing of the Consumer Price Index undertaken by the National Bureau of Statistics (NBS) in February 2025. Inflation in Nigeria has remained persistently elevated over the past decade, entering double digits in January 2016 and reaching a 28-year high of 34.80% in December 2024. Although recent figures indicate a decline, the Nigerian economy continues to face significant vulnerability to both domestic and external shocks, which could potentially reverse the recent disinflationary gains achieved.
A key policy tool in the hands of the CBN is the Monetary Policy Rate (MPR), which serves as the benchmark interest rate used to influence liquidity conditions, borrowing costs, and overall economic activity. Theoretically, by adjusting the MPR, the CBN seeks to control inflation by moderating aggregate demand, stabilizing prices, and anchoring inflation expectations. The CBN had aggressively pursued a contractionary monetary policy, raising the MPR from 11.5% in January 2022 to 27.5% between November 2024 and July 2025. As of April 2026, the MPR stands at 26.5%, which represented a 50-basis point reduction from 27% in January 2026, a level that had remained unchanged since August 2025. The effectiveness of the MPR depends on the strength of the monetary transmission mechanism and the extent to which changes in the policy rate are transmitted to lending rates, investment decisions, and consumption patterns within the economy.
However, several stakeholders have argued that adjustments in the MPR alone are insufficient to fully address inflationary pressures in Nigeria, largely due to persistent supply-side constraints that limit aggregate supply and raise the cost of production. Empirical trends support this view. Between November 2021 and December 2024, inflation increased significantly from 15.4% to 34.8%, despite a substantial rise in the MPR from 11.5% to 27.5% over the same period. This divergence suggests a weakened transmission mechanism, where tightening monetary policy did not translate into immediate inflation control. It was only after December 2024 that a more visible alignment between the MPR and inflation began to emerge.
This article highlights two key channels of the monetary policy transmission mechanism, the interest rate channel, and the exchange rate channel, and provides insights into why, despite aggressive monetary tightening, inflation in Nigeria remained persistent, particularly prior to the rebasing exercise conducted by the NBS. It further explains the recent re-emergence of a clearer relationship between the MPR and inflation, highlighting the progress made by the CBN in enhancing the effectiveness of both channels, a reflection of improvements in policy transmission alongside evolving macroeconomic conditions. It emphasizes the limitations of the interest rate channel in the presence of structural rigidities, as well as the inability in attracting foreign portfolio investment (FPI) for the most part of 2022-2024, partly explained by the concept of the unholy trinity, acknowledging the constraints faced in simultaneously achieving exchange rate stability, monetary independence, and capital mobility.
