Transmission Challenge in Nigeria’s Monetary Policy
Adaeze Obi
The beginning of a new year is typically a moment for reassessment. For policymakers, it is a time to evaluate what has worked, what has not, and what must change. In monetary policy, the test is not how decisively action is announced, but how effectively it transmits through the economy.
Policy rates matter only to the extent that they influence prices, credit, investment, and household welfare.
When those links weaken, tightening becomes costly without being corrective.
As the year opens, this challenge is increasingly visible in Nigeria’s current macroeconomic environment.
At its 303rd Monetary Policy Committee meeting held in late November 2025, the Central Bank of Nigeria (CBN) retained the Monetary Policy Rate (MPR) at 27 per cent, maintaining a highly restrictive stance as the economy entered the new year.
At the same time, headline inflation stood at 14.45 per cent year on year in November 2025, reflecting only modest easing despite prolonged tightening.
These figures frame the economic starting point of the year and highlight a growing disconnect between policy intent and economic outcome.
Theory Structural Constraints
In standard Keynesian and monetarist economic theory, as developed by John Maynard Keynes and later formalised by Milton Friedman and New Keynesian economists, higher interest rates reduce inflation by dampening aggregate demand. Borrowing slows, consumption moderates, and price pressures ease.
This mechanism works best when inflation is demand- driven and when financial markets efficiently transmit policy signals to households and firms. Nigeria’s inflation, however, is largely structural.
Food prices remain heavily influenced by insecurity, logistics inefficiencies, climate related disruptions, and supply chain weaknesses. Core inflation continues to reflect exchange rate pass through, elevated energy costs, and import dependence.
In this context, tighter monetary policy addresses symptoms rather than causes, while intensifying stress across the real economy.
Currency Transmission Gap
The credit channel illustrates this weakness clearly. With the policy rate at 27 per cent, commercial lending rates have climbed even higher as banks price in funding costs and risk premiums. Data from the banking system show that financial institutions increasingly prefer placing funds with the central bank rather than extending credit, attracted by high-risk free returns.
By late 2025, banks’ deposits with the central bank had risen to over ₦336 trillion, tightening credit conditions just as businesses plan for a new year of operations and investment. For small and medium sized enterprises, borrowing has become prohibitively expensive, constraining expansion at a time when growth is most needed. Exchange rate dynamics further complicate transmission. Currency adjustments were necessary to correct distortions, but in an import dependent economy depreciation continues to feed rapidly into domestic prices.
Higher interest rates provide limited insulation against imported inflation and instead raise financing costs for local producers who might otherwise expand capacity and reduce exposure to external shocks.
What 2026 Demands
The macro-economic outcome is paradoxical. Tight money suppresses growth and employment while doing little to ease inflation driven by structural supply constraints. Price pressures persist not because demand is excessive, but because productive capacity remains impaired. None of this implies that monetary discipline is optional. Price stability remains essential. But discipline without coordination is insufficient. Monetary policy cannot compensate on its own for deep rooted structural weaknesses. As the year begins, restoring transmission should be the priority. Supply side drivers of inflation must be addressed alongside monetary tools. Credit access for productive sectors must be protected. Domestic supply chains must be strengthened. Adjustment must not erode economic capacity. If the new year is to deliver more than endurance, monetary policy must work not just in theory, but in practice. When inflation remains elevated, credit contracts, and households feel poorer despite tightening, the problem is not resolved. It is transmission. Fixing that gap is the macroeconomic task of this moment.
.Adaeze is a finance expert at Technooil limited with deep research driven economic insights and a former PwC senior consultant.
