Monetary Policy and Inflation Dynamics in Nigeria, Evaluating the Role of Interest Rates and Fiscal Coordination for Economic Stability

This paper explores the intricate relationship between interest rates and inflation in Nigeria, emphasizing their critical role in shaping monetary policy. Over the past decade, inflation has exhibited significant volatility, often driven by structural constraints and external shocks, such as the COVID-19 pandemic. Interest rates, as a key monetary policy tool, have been utilized to influence economic behavior, impacting borrowing costs and investment decisions. However, the effectiveness of this tool in curbing inflation remains a subject of debate, particularly in the Nigerian context. Using fifteen years of monthly data obtained from the Central Bank of Nigeria, this study examines the co-movement of interest rates and inflation, highlighting periods of both inverse and direct relationships. Key findings reveal that while interest rate adjustments can moderate aggregate demand, their impact on inflation is limited by supply-side constraints, including disruptions in food production and rising input costs. Notably, the study observes an anomaly in the post-COVID-19 period, where rising interest rates coincided with increasing inflation, highlighting the influence of supply chain disruptions and policy lags. This study contributes to the literature by providing data-driven insights into the dynamics of inflation and interest rates in Nigeria, emphasizing the need for complementary fiscal measures to address structural challenges. The findings highlight the limitations of interest rate policies in managing cost-push inflation and underscore the importance of integrating broader economic strategies to achieve price stability. This research offers valuable implications for policymakers, aiming to enhance the effectiveness of monetary policy in a rapidly evolving economic landscape.