Monetary Policy Credibility and the Transition to Explicit Inflation Targeting: A Structural Analysis of the Nigerian Economy (2023–2026)

Abstract

The global monetary landscape has shifted significantly toward Inflation Targeting (IT) as a primary mechanism for macroeconomic stability. In late 2023, Nigeria transitioned from monetary aggregate targeting to an explicit IT framework to combat chronic price instability following major structural reforms, including fuel subsidy removal and Exchange Rate (EXR) unification. This study evaluates the efficacy of the Central Bank of Nigeria’s (CBN) 2024–2026 policy pivots a period characterized by an aggressive "hawkish" stance where the Monetary Policy Rate (MPR) peaked at 27.25% before a cautious easing to 26.50% in early 2026. Utilizing a Structural Vector Autoregression (SVAR) model with monthly data from 2018 to 2025, the research analyzes the "interest rate-inflation" nexus and Exchange Rate Pass-Through (ERPT) dynamics. Empirical results from the Forecast Error Variance Decomposition (FEVD) reveal that EXR volatility remains the dominant driver of inflation, accounting for 52.4% of price variations over a 24-month horizon. While the MPR demonstrates a growing influence on inflation over time, a significant transmission lag of 12 to 24 months is observed, hindered by structural rigidities and persistent fiscal dominance. The findings suggest that while inflation moderated to approximately 15.06% by February 2026, the disinflationary path remains fragile and highly susceptible to supply-side shocks and energy costs. The study concludes that for IT to be effective in Nigeria, monetary tightening must be synchronized with fiscal discipline and structural interventions in the energy and agricultural sectors to address cost-push pressures.