Interest Rates and Inflation in Nigeria: Empirical Evidence from the Autoregressive Distributed Lag Model

Abstract

Policymakers and scholars continue to have extensive conversations about the relationship between interest rates and inflation in Nigeria. This is because, despite the efforts of Nigerian policymakers and regulatory authorities to achieve a high level of sustainable growth, the economy continued to witness stunted growth over the years, primarily due to double-digit inflation that continuously erodes value. In light of this, this study looked at how interest rates have affected Nigeria’s inflation rate over the last 16 years. The research design for this study is ex-post facto, using time series data for 68 quarters between Q1, 2006 to Q4, 2022. Data were obtained from the databases of the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and the World Development Indicator (WDI). The study utilized the Autoregressive Distributed Lag (ARDL) model to analyze the effect of interest rates on inflation in Nigeria, while the Augmented Dickey-Fuller (ADF) and Phillip-Perron were employed for the stationarity test. The results of the analysis showed that interest rates have a long-run significant cointegrating relationship with the inflation rate (Adj R2 = 0.48; F-stat (4, 63) = 19.61 p < 0.05). The study therefore recommends that the CBN could alternate its approach to managing inflation in Nigeria by regulating the amount of money in circulation in addition to solely utilizing the interest rates through the MPR’s operation. Furthermore, since the CBN has little control over the other elements, monetary policy by itself is unable to reduce inflation in Nigeria. To guarantee the elimination of all barriers to reducing inflation in Nigeria, the report recommends that the monetary authority work in tandem with the fiscal authority and all pertinent ministries, departments, and agencies (MDAs).