Impact of CBN Monetary Policy Rate on Inflation and Unemployment in Nigeria: 2015–2025

Abstract

This study examines the dynamic relationship between the Central Bank of Nigeria's Monetary Policy Rate (MPR), headline inflation, and real GDP growth (employed as a labour-market activity proxy in place of unemployment, owing to a 2022 methodological break in Nigeria's official unemployment series) over the period 2015Q1 to 2025Q4. Using quarterly data and a Vector Error Correction Model (VECM), the study finds that the three series are non-stationary in levels but stationary in first differences, and that a single statistically significant cointegrating relationship exists among them. The error correction estimates show that inflation adjusts significantly toward long-run equilibrium following monetary policy shocks, while GDP growth behaves as a weakly exogenous variable in the system. Impulse response analysis indicates that a positive MPR shock is associated with a persistent rise in inflation over the following two to three years before the effect decays, a result consistent with the lagged, cost-channel-dominated transmission mechanism widely reported in the Nigerian monetary policy literature, and inconsistent with the textbook expectation of disinflation following monetary tightening. The response of GDP growth to MPR shocks is small and changes sign within the forecast horizon, suggesting weak and inconsistent real-economy transmission. Variance decomposition results show that MPR shocks explain a moderate share of inflation forecast error variance (around 20–32 percent across horizons) but a negligible share of GDP growth variance. The findings suggest that the CBN's interest rate channel has historically been a comparatively weak instrument for managing both price stability and real economic activity in Nigeria, with structural and exchange-rate-driven cost factors likely playing a dominant role in the inflation process. The paper concludes with policy recommendations on complementing monetary tightening with structural and exchange-rate measures, and notes important data limitations that should be addressed before final submission.