The Impact of High Interest Rates on Economic Growth in Nigeria: A Critical Analysis of the Central Bank’s Monetary Policy

Abstract

This study examines the effect of high interest rates on economic growth in Nigeria, focusing on the Central Bank of Nigeria's (CBN) monetary policy framework. It specifically evaluates the short-run and long-run relationships among the Monetary Policy Rate (MPR), Gross Domestic Product (GDP), inflation rate, exchange rate, and broad money supply. The study adopts an ex-post facto research design and employs annual time-series data covering 2005–2024. The study analyzes data using the Autoregressive Distributed Lag (ARDL) model to examine short-run and long-run dynamics among variables with different orders of integration. The model assesses the effects of MPR, inflation rate, exchange rate, and broad money supply on economic growth. The findings indicate that high interest rates, proxied by MPR, have a statistically significant negative effect on GDP, suggesting that tight monetary policy constrains economic growth by increasing borrowing costs and discouraging private investment. Conversely, broad money supply has a positive and statistically significant effect on GDP, demonstrating the importance of adequate liquidity in stimulating investment and productive economic activities. The findings further indicate that although inflation control remains essential, excessively high interest rates may undermine output expansion and private-sector investment. The study concludes that the CBN should pursue a balanced monetary policy that controls Inflation without imposing excessively restrictive interest rates. Policymakers should improve access to affordable credit for businesses and households and strengthen monetary-fiscal policy coordination. Such measures would support investment, sustainable economic growth, price stability, and improved macroeconomic performance in Nigeria.