ABSTRACT

Results of monetary policy outcomes suggest that Nigeria does not enjoy ideal conditions for adopting a monetary policy regime aimed primarily at stabilizing prices under a freely floating exchange rate. Reasons often advocated for this include Nigeria’s volatile macroeconomic environment and a more acute inflation-output trade-off compared with other emerging market economies that have embraced price stabilization programs and abandoned their exchange rate anchors (Otolorin & Orebiyi, 2024). Moreover, Nigeria has an intense exchange of goods and services with the rest of the world, stronger than other emerging market economies, owing to its mainly oil-exporting-oriented economy. This makes Nigeria particularly exposed to price and quantity-type external shocks, which renders price stabilization all the more complicated (Oyadeyi, 2024).

Open Market Operation is one of the monetary policy tools of the Central Bank of Nigeria (CBN), entailing the sale or purchase of eligible bills or securities in the open market for the purpose of influencing deposit money banks’ reserve balances and the level of base money, ultimately aimed at achieving the price stability objectives of the CBN (Central Bank of Nigeria, 2022). Thus, this study sought to examine the impact of Open Market Operation on the maintenance of exchange rate price stability in Nigeria and to determine the impact of Open Market Operation on the maintenance of consumer price stability in Nigeria. The research design adopted is the ex post facto research design, enabling the use of secondary data. Annualized data covering the period of study were sourced from the Central Bank of Nigeria Statistical Bulletin and complementary recent empirical literature. A regression-based estimation technique was used to evaluate the stated objectives, with the Open Market Operation Rate (OMOR) as proxy for Open Market Operation (OMO) serving as the independent variable, while the Nominal Effective Naira Exchange Rate Indices (EXR), Inflation Rate (INFR), and Gross Domestic Product Growth Rate (GDPGR) served as control variables.

Recent evidence (Alika, Ojije, Lukat & Oduniyi, 2024) shows that while OMOs regulate liquidity within the banking system efficiently, they have been less effective at controlling overall money supply growth, which helps explain the continuous rise in inflation in Nigeria despite sustained OMO activity. Similarly, recent findings on monetary policy and exchange rate stability in Nigeria indicate that interest rates, money supply, and central bank reserves significantly influence exchange rate fluctuations, with central bank reserves having the most substantial impact (Nwankwo, Anozie & Okonkwo, 2023). The study recommends, among other things, the increased and more strategic use of open market operations as a tool for achieving price stability in Nigeria, alongside a conscious effort by monetary authorities to bring the informal sector into the mainstream of the Nigerian economy, which would help expand and capture the substantial funds presently outside the formal banking system.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In general terms, monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity. For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Central Bank of Nigeria, 2022). These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth.

The importance of price stability is derived from the harmful effects of price volatility, which undermines the ability of policymakers to achieve other macroeconomic objectives. There is a general consensus that domestic price fluctuation undermines the role of money as a store of value and frustrates investment and growth. Recent empirical work on the relationship between monetary policy instruments, inflation, and growth in Nigeria continues to confirm the long-standing inverse relationship between persistent inflation and sustainable growth, using a Toda-Yamamoto causality approach covering recent data (Okosu, Okoduwa, Ita & Egonu, 2022). Similarly, threshold-based evidence on inflation, interest rate, and exchange rate thresholds in Nigeria found that monetary policy rate thresholds matter for the direction and magnitude of growth effects, underscoring that stable prices remain essential for sustainable economic growth in the Nigerian context.

The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the choice and mix of instruments used. In Nigeria, the design and implementation of monetary policy is the responsibility of the Central Bank of Nigeria (CBN). The mandates of the CBN include issuing legal tender currency, maintaining external reserves to safeguard the international value of the currency, promoting monetary stability and a sound financial system, and acting as banker and financial adviser to the Federal Government (Central Bank of Nigeria, 2022).

The current monetary policy framework in Nigeria has historically focused on the maintenance of price stability, with the promotion of growth and employment treated as secondary goals. The CBN’s overriding objective has been price and exchange rate stability. For a considerable period, the monetary authority’s strategy for inflation management rested on the view that inflation is essentially a monetary phenomenon, with the broad measure of money (M2) serving as an intermediate target and the monetary base as the operating target. To achieve this, the CBN utilized a mix of indirect, market-determined instruments, including reserve requirements, open market operations on Nigerian Treasury Bills (NTBs), liquidity ratios, and the discount window (Kure, Zimboh, Okedigba & Ituen, 2021).

More recently, however, Nigeria has begun a deliberate transition away from pure monetary targeting. Analysis of Nigeria’s inflation-targeting paradox indicates that the country formally began transitioning to an inflation-targeting monetary policy framework from late 2023, moving away from the monetary-targeting framework that had been in place for decades. This shift has been corroborated by the CBN’s own communications: the Central Bank reported that headline inflation declined from 34.80 percent in December 2024 to 15.15 percent in December 2025, a moderation it attributed to sustained monetary tightening, improved exchange rate stability, and easing food price pressures (Central Bank of Nigeria, 2025). Reporting on the CBN’s policy dialogue with the Nigerian Economic Society in early 2026 similarly confirmed that the apex bank is intensifying its shift toward a rules-based, inflation-targeting framework, with a medium-term inflation goal of 6 to 9 percent, even as officials acknowledge that external shocks could pose risks to this trajectory (African Business, 2026).

Prior to the market-based reforms of 1986, the CBN relied on direct, non-market monetary instruments such as credit ceilings on deposit money banks, administered interest and exchange rates, and prescribed cash reserve requirements, in an effort to achieve sustainable growth and employment objectives. During the 1970s, the Nigerian economy experienced major structural changes connected to the dominance of oil in the country’s export basket, and the rapid monetization of oil receipts induced rapid monetary growth and a shift of the fiscal balance from surplus to deficit. This pattern of fiscal dominance, in which central bank credit to government undermines the market-based instruments of monetary policy, remains a live concern in the Nigerian literature. An empirical assessment of the impact of CBN’s credit to the Federal Government on the effectiveness of open market operations in Nigeria, using quarterly data and an ARCH/GARCH approach, found that fiscal deficits rise and fall as CBN credit to government rises and falls, and that CBN credit to the Federal Government had a significant negative effect on the effectiveness of OMO sales in Nigeria (Kure, Zimboh, Okedigba & Ituen, 2021). This reinforces concerns that fiscal pressures continue to complicate the pursuit of an independent, price-stability-oriented monetary policy in Nigeria, much as earlier structural adjustment episodes did.

Having examined the objectives of monetary policy in Nigeria, this study intends to find out the impact of monetary policy, through the use of open market operations, on enhancing price stability in Nigeria between 2018 and 2025.

1.2 STATEMENT OF THE PROBLEM

Results of monetary policy outcomes suggest that Nigeria does not often enjoy ideal conditions for adopting a monetary policy regime aimed primarily at stabilizing prices under a freely floating exchange rate. There are several possible reasons for this. The Nigerian macroeconomic environment is often highly volatile and exhibits a more acute inflation-output trade-off than other emerging market economies that have embraced price stabilization programs and abandoned their exchange rate anchors. Moreover, Nigeria has an intense exchange of goods and services with the rest of the world, stronger than other emerging market economies, owing to its mainly oil-exporting-oriented economy. This exposes Nigeria particularly to price and quantity-type external shocks, which renders price stabilization all the more complicated. Recent threshold-based evidence on exchange rate pass-through in Nigeria found that although the Nigerian consumer price index is not strongly sensitive to direct commodity-price shocks such as changes in the price of oil, changes in the Nigerian exchange rate are passed through to domestic prices sizably and significantly, and that this pass-through dynamic has intensified amid the country’s exchange rate reforms since 2023 (Oyadeyi, 2024). Thus, given the above, the problems associated with the use of open market operations as a monetary policy tool, given the broader objectives of monetary policy in an economy aiming to maintain stability, are price instability and exchange rate instability in Nigeria.

Nigerian consumer prices have remained volatile, and more dramatically so than in other emerging market economies, creating problems for the conduct of a monetary policy aimed at price stability, because the optimal policy response to exchange rate shocks depends on the source and duration of the shock, which is typically unknown and hard to decipher in an unstable macroeconomic environment. A study on exchange rate variability in Nigeria, using a GARCH-MIDAS technique on monthly and daily data through mid-2023, identified price-level differentials, interest rate differentials, terms of trade, stock market performance, oil prices, and central bank foreign exchange supply as key drivers of persistent Naira depreciation, reinforcing the conclusion that the Nigerian exchange rate, as well as short- and long-term interest rates, may vary endogenously with broader fiscal and external conditions. This is consistent with more recent work using a time-varying parameter vector autoregression (TVP-VAR) approach, which found that despite an intensified monetary tightening cycle beginning in the second quarter of 2022, during which the Monetary Policy Rate was raised multiple times, headline inflation in Nigeria nonetheless reached an all-time high in over a decade by mid-2024, suggesting that the interest rate transmission channel of monetary policy in Nigeria has been weak and that fiscal and structural constraints continue to limit the effectiveness of market-based instruments such as open market operations (Bello & Isah, 2025). Given these conditions, it is reasonable to expect that pursuing a stable-prices, free-float regime in the long run in Nigeria has faced, and continues to face, significant practical obstacles, even as the CBN has more recently moved toward a rules-based, inflation-targeting framework intended to address some of these credibility concerns (African Business, 2026).

An exchange-rate target can also result in the loss of independent monetary policy. With open capital markets, an exchange-rate target causes domestic interest rates to be closely linked to those of an anchor country or currency area, and shocks affecting the anchor are directly transmitted to the targeting economy. A study on exchange rate dynamics and regimes in Nigeria, using data from 1986 to 2022 and a modified sticky-price model with cointegration and parameter stability tests, found that Nigeria’s continuous currency depreciation over this period could be attributed in part to policy inconsistency across its various exchange rate regimes, including the transition from a managed peg around 2015 and 2016 to a managed float regime that persisted from 2016 through 2022 (Otolorin & Orebiyi, 2024). This is broadly consistent with the longstanding concern in the literature that exchange-rate targeting in emerging market countries can promote financial fragility, since it leaves economies exposed to speculative pressure and limits the central bank’s ability to respond independently to domestic shocks.

Studies evaluating the costs of inflation have long established the desirability of avoiding not only high but even moderate inflation. A study on the effect of exchange rate volatility on inflation in Nigeria similarly found a measurable relationship between currency volatility and domestic price pressures, reinforcing the view that exchange rate instability is a key transmission channel for inflation in import-dependent economies such as Nigeria (Sahoo & Sahu, 2023). An important issue in this debate concerns the reduced ability to conduct effective countercyclical monetary policy once inflation, or the policy rate, approaches structurally binding constraints. A threshold analysis of inflation, interest rate, and exchange rate effects on Nigerian economic growth found that a monetary policy rate threshold near 16.5 percent appears critical for Nigeria, with growth effects differing in magnitude depending on whether the policy rate is above or below this threshold, a finding the authors linked to Nigeria’s persistently high inflation environment, which stood at over 24 percent in mid-2023. Although the CBN’s pursuit of inflation control through OMO and policy rate adjustments does appear to have begun moderating headline inflation more recently, the likely effects of this tightening on the real side of the economy remain a subject of debate. Experience and recent econometric evidence, including the TVP-VAR study referenced above, suggest that inflation expectations and output costs do not always adjust as quickly as theory would predict following a shift toward a more rules-based, credible monetary framework, and that the sacrifice ratio associated with disinflation in Nigeria has, at times, remained substantial (Bello & Isah, 2025).

1.3 OBJECTIVES OF THE STUDY

As a result of the problems stated above, the main objectives of this study are:

1. To examine the impact of Open Market Operation on the maintenance of exchange rate price stability in Nigeria.

2. To determine the impact of Open Market Operation on the maintenance of consumer price stability in Nigeria.

1.4 RESEARCH QUESTIONS

As a result of the above objectives, the following research questions emanate:

1. To what extent does Open Market Operation in Nigeria assist in the maintenance of exchange rate price stability?

2. To what extent does Open Market Operation impact on the maintenance of consumer price stability in Nigeria?

1.5 RESEARCH HYPOTHESES

Following the research questions raised above, the following hypotheses are stated:

1. Open Market Operation does not have a significant positive impact on exchange rate price stability in Nigeria.

2. Open Market Operation does not have a significant positive impact on consumer price stability in Nigeria.

1.6 SCOPE OF THE STUDY

This study covers the period 2018 to 2025. OMO was introduced in Nigeria at the end of June 1993 and is conducted wholly on Nigerian Treasury Bills (NTBs), including repurchase agreements (repos). OMO entails the sale or purchase of eligible bills or securities in the open market by the CBN for the purpose of influencing deposit money banks’ reserve balances and the level of base money, and consequently the overall level of monetary and financial conditions (Central Bank of Nigeria, 2022). In this transaction, banks subscribing to the offer draw on their reserve balances at the CBN, thereby reducing the overall liquidity of the banking system and the banks’ ability to create money via credit. In implementing OMO, the Research Department of the CBN advises the trading desk at the Banking Operations Department on the level of excess or shortfall in bank reserves; the trading desk then decides on the type, rate, and tenor of securities to be offered. Over the period under review, the CBN substantially intensified its use of OMO and the Monetary Policy Rate as complementary liquidity-management tools: the Monetary Policy Rate was raised in stages from 11.5 percent in March 2022 to 18.75 percent by mid-2023, and further still through 2024, peaking at 27.25 percent in September 2024, before easing modestly to around 26.5 percent by early 2026 as disinflation took hold (African Business, 2026; Central Bank of Nigeria, 2025).

1.7 SIGNIFICANCE OF THE STUDY

This study will be significant to the following groups:

1. Monetary Policy Makers

Monetary policy decisions are made in real time and are based, by necessity, on preliminary data and estimates that contain considerable noise and are often substantially revised months or years after the event. Recent IMF assessments of Nigeria’s macroeconomic policy stance emphasize the importance of tightening macroeconomic policy to contain inflation and of developing more robust foreign exchange intervention frameworks alongside a credible roadmap toward inflation targeting (International Monetary Fund, 2025). This study will assist policymakers in formulating policies that conform with the evolving objectives of monetary policy in Nigeria, particularly as the country continues its transition toward a more rules-based framework.

2. Academic Purpose

This study will trace the more recent history of monetary policy in Nigeria, especially the use of open market operations as a tool of monetary policy from 1993 to the present, including the country’s recent transition toward inflation targeting from late 2023. It will thereby contribute to the growing volume of literature in this area of finance and macroeconomics.

3. General and Interested Public

This study will be significant to the general and interested public because it will help them better understand how monetary policy decisions, including the use of open market operations, affect exchange rate movements, inflation, and overall economic wellbeing.

1.8 DEFINITION OF TERMS

The following terms, as they relate to this study, are defined:

Monetary Policy: a combination of measures designed to regulate the value, supply, and cost of money in an economy, in consonance with the expected level of economic activity (Central Bank of Nigeria, 2022).

Open Market Operation: the sale or purchase of eligible bills or securities in the open market by the CBN for the purpose of influencing deposit money banks’ reserve balances and the level of base money, and consequently the overall level of monetary and financial conditions (Central Bank of Nigeria, 2022).

Inflation Targeting: a monetary policy framework involving the public announcement of medium-term numerical targets for inflation, an institutional commitment to price stability as the primary goal of monetary policy, and increased accountability of the central bank for attaining its inflation objectives, as described in recent analyses of Nigeria’s transition toward this framework.

Exchange Rate Targeting: a monetary policy approach in which the value of the domestic currency is anchored to a foreign currency, a basket of currencies, or another reference value, with the central bank intervening in the foreign exchange market to maintain that anchor (Otolorin & Orebiyi, 2024).

Price Stability: a state in which the inflation rate is low, stable, and ideally in single digits, such that economic agents no longer need to take account of prospective changes in the general price level in their economic decision-making (Central Bank of Nigeria, 2025).

REFERENCES

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