Evaluation of the Effectiveness of Monetary Policy Transmission Mechanisms in Nigeria’s Financial System

Monetary policy transmission effectiveness is a central concern for the Central Bank of Nigeria, as weak transmission limits the ability of interest rate and credit policy to stabilise prices and support growth. This study evaluates the effectiveness of the interest rate, credit, exchange rate, and asset price channels of monetary policy transmission in Nigeria's financial system for the period 2005 to 2022. Secondary data were sourced from the Central Bank of Nigeria Statistical Bulletin, the National Bureau of Statistics, and the Nigerian Exchange Group. Vector autoregression modelling, forecast error variance decomposition, and impulse response function analysis were employed to assess the relative strength of each transmission channel. Results showed that the credit channel was the strongest transmission mechanism, accounting for 31% of the variance in inflation explained by monetary policy shocks over a 12-quarter horizon. The interest rate channel showed sluggish pass-through, with commercial bank lending rates adjusting by only 0.62 percentage points per 1 percentage point monetary policy rate change. The exchange rate channel had increased in importance following the 2016 and 2023 naira devaluations. The asset price channel remained weak due to shallow capital market depth. The study concludes that monetary policy transmission in Nigeria is primarily credit-led and recommends complementary financial market deepening strategies to strengthen the interest rate and asset price channels.

Keywords: monetary policy transmission, credit channel, interest rate channel, Central Bank of Nigeria, vector autoregression