INTEREST RATE TRANSMISSION MECHANISMS IN THE NIGERIAN ECONOMY

Abstract

Interest rate pass-through, the responsiveness of retail bank lending and deposit rates to changes in the policy rate, plays a critical role in assessing the effectiveness of monetary policy. This study investigates interest rate pass-through in the context of Nigeria's evolving monetary policy framework, with a focus on the period following the introduction of the monetary policy rate (MPR) in December 2006. By exploring the relationship between the policy rate, interbank rate, and retail bank lending and deposit rates, we aim to provide insights into the extent and effectiveness of interest rate pass-through in Nigeria.

Existing literature presents a varied landscape regarding interest rate pass-through, with some studies indicating incomplete pass-through and others suggesting complete pass-through. Factors contributing to this variation include demand elasticity of deposits and loans, alternative financing sources, asymmetries, switching costs, and the banking system's concentration.

Our research contributes to the understanding of interest rate pass-through in Nigeria by employing a comprehensive analysis over an extended time frame. Unlike previous studies that focused on shorter periods or used annual data, we employ a more granular approach to assess the dynamics of interest rate pass-through in Nigeria's evolving monetary policy landscape.