Interest Rate Pass-Through in Nigeria

Oyadeyi, Olajide (2022): Interest Rate Pass-Through in Nigeria. Published in: Journal of Economics and Development Studies , Vol. 10, No. 2 (10 October 2022): pp. 49-62.

Abstract

This paper examined interest rate pass-through in Nigeria using monthly data from 2006 to 2020. It focused on the pass-through process from the policy rate to the money market and retail rates and from the pass-through of the money market rates to the retail rates. The results showed that there was an incomplete short-run pass-through with a higher degree from the policy rate to the money market rate, while the pass-through process over-shoot in the long run. However, this pass-through was found to be very weak and incomplete from the policy rate to the retail rates and from the money market rates to the retail rates. The mean adjustment lags suggested that it takes a quicker period for policy rate changes to fully reflect on the money market and retail segment of the market. Finally, the deposit rates were found to respond more significantly, albeit slowly, to changes in the policy and interbank rates compared to the lending rates. In essence, we recommend that the monetary authorities critically appraise the size of interest rate pass-through to the retail and money market rates in light of the heterogeneous response from the policy rate to the retail and money market rates.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest Rate Pass-Through; Monetary Policy Rate; Lending Rates, Deposit Rates and; Interbank Rates
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Ahmad, A.H., Aziz, N. & Rummun, S. (2013). “Interest Rate Pass-Through in the UK: Has the Transmission Mechanism Changed During the Financial Crisis?” Economic Issues, 18(1), 17 – 37.

Amatyakul, P., Taerat, A., Visudtiko, N., & Wongwachara, W. (2019). “Interest rate pass-through in Thailand: New evidence from loan-level data” Monetary Policy Department, Bank of Thailand, 1 – 29.

Ansari, J. (2013). “A Theoretical and Empirical Analysis of Interest rate pass-through in India with Regulatory Requirements” Beykent University Journal of Social Sciences – BUJSS, 6(2), 83 – 104.

Antão, P. (2009). “The Interest Rate Pass-Through of The Portuguese Banking System: Characterization and Determinants” Banco De Portugal, Estudos e Documentos de Trabalho Working Papers, 1 – 44.

Aziakpono, M. J. and Wilson, M. K. (2013). “Interest Rate Pass-through and Monetary Policy Regimes in South Africa” AERC Research Paper No. 259, 1 – 67.

Bangura, L. (2011). “Adjustment of Commercial Banks Interest Rates and the Effectiveness of Monetary Policy: Evidence from Anglophone West Africa.” Master thesis of Commerce (Financial Markets). Department of Economics and Economic History, Rhodes University Grahamstown.

Belke, A., Beckmann, J. & Verheyen, F. (2012). “Interest Rate Pass-Through in the EMU: New Evidence from Nonlinear Cointegration Techniques for Fully Harmonized Data” RUHR Economic Papers No. 350, 1 – 30.

Binning, A., Bjørnland, H. C. & Maih, J. (2019). “Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-Through in a DSGE Model” Norges Bank Research Working Paper 22, 1 – 69.

Binning, A., Bjornland, H. C., & Maih, J. (2017). “Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-through in a DSGE Model” Norges Bank Working Paper 1-73.

Bogoev, J. & Petrevski, G. (2012). “Interest Rate Pass-Through in a Small Open Economy with a Fixed Exchange Rate - The Case of Macedonia” Procedia - Social and Behavioral Sciences 44, 125 – 133.

Bredin, D., Fitzpatrick, T., & Reilly, G.O. (2001). “Retail Interest Rate Pass-Through: The Irish Experience.” Central Bank of Ireland Research Technical Papers [online], 6/RT/01. Available from: http://www.centralbank.ie/publications/documents/6rt01.pdf

Brunnermeier, M. K. & Koby, Y. (2019). “The Reversal Interest Rate” IMES Discussion Paper Series No. 19-E-06, Institute for Monetary and Economic Studies, Bank of Japan.

Central Bank of Nigeria (2018). “CBN Statistical Bulletin and Annual Report,” Central Bank of Nigeria. Retrieved from http://www.cbn.gov.ng.

Darracq-Paries, M., Moccero, D. N., Krylova, E. & Marchini, C. (2014). “The Retail Bank Interest Rate Pass-Through - The Case of the Euro Area During the Financial and Sovereign Debt Crisis” European Central Bank Occasional Paper Series No, 155, 1 – 46.

De Bondt, G. (2002). “Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level” ECB Working Paper No, 136, 1 – 44.

De Bondt, G., (2005). “Interest Rate Pass-Through: Empirical Results for the Euro Area.” German Economic Review 6 (1), 37–78.

Deveroux, M. B. & Engels, C. (2002). “Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect” Journal of Monetary Economics 49, 913–940.

Ewerhart, C., Cassol, N., Ejerskov, S. & Valla, N. (2004). “Sporadic Manipulation of Money Market with Central Bank Standing Facilities” European Central Bank Working Paper Series No. 399.

Fomum, T. A. (2011). “Interest Rate Pass-Through in Cameroon and Nigeria: A Comparative Analysis.” Master of Commerce in Financial Markets thesis. Rhodes University, Grahamstown.

Frisancho-Mariscal, I. B., & Howells, P. (2011). “Interest Rate Pass-Through and Risk” Centre for Global Finance, Bristol Business School, 1 – 22.

Gigineishvili, N. (2011). “Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?” IMF Working Paper, 11/176, 1 – 20.

Gregor, J. & Melecky, M. (2018). “The Pass-Through of Monetary Policy Rate to Lending Rates: The Role of Macro-Financial Factors” MPRA Working Paper No. 84048, 1 – 47.

Gregor, J., Melecký, A. & Melecký, M. (2019). “Interest Rate Pass-Through A Meta-Analysis of the Literature” Policy Research Working Paper No 8713, 1 – 53.

Grigoli, F. & Mota, J. M. (2017). “Interest Rate Pass-Through in the Dominican Republic” Lat Am Econ Rev, 26(4), 1 – 25.

Hsu, C. C. (2017). “The Interest Rate Pass-Through: An Empirical Study of Seven Asian Economies” Global Journal of Business Research, 11(2), 1 – 10.

Lerskullawat, A. (2014). “Financial Development and Monetary Policy Transmission: The Case of Thailand” An unpublished PhD. Thesis Submitted to The University of Birmingham, England.

Liu, K. (2019). “The determinants of China’s lending rates and interest rates pass-through: A cointegration analysis” Research in Economics, 73, 66–71.

Mahmood, F. (2008). “Interest Rate Pass-Through in Pakistan: Evidence from the Asymmetric Co-integration Approach” NUST Journal of Social Sciences and Humanities 4(2), 168-183.

Mangwengwende, T., Chinzara, Z. & Nel, H. (2011). “Bank Concentration and The Interest Rate Pass-through in Sub-Saharan African Countries” Rhodes University Working Paper, 233, 1 – 31.

Mbowe, W. E. (2015). “Monetary Policy Rate Pass-through to Retail Bank Interest Rates in Tanzania” Bank of Tanzania Working Paper No 4, 1 – 26.

Miletic, S. & Tasic, N. (2015). “Interest Rate Pass-Through in Serbia: An Asymmetric Threshold Cointegration Analysis” Faculty of Business Economics and Entrepreneurship, EEE, 240 – 251.

Mordi, C. N. and Adebiyi, M. A. (2014). “The Effect of Monetary Policy on Prices in Nigeria: A Factor Augmented Vector Autoregressive (FAVAR) Modelling Approach” Central Bank of Nigeria, Nigeria.

Mordi, C. N. O., Adebiyi, M. A. & Omotosho, B. S. (2019). “Modelling Interest Rates Pass-Through in Nigeria: An Error Correction Approach with Asymmetric Adjustments and Structural Breaks” MPRA Paper No 96171, 1 – 25.

Mueller-Spahn, S. (2008). “The Pass-Through from Market Interest Rates to Retail Bank Rates in Germany” Centre for Finance and Credit Markets, Working Paper 08/05, 1 – 24.

Ogundipe, A. & Alege, P (2013). “Interest Rate Pass-Through to Macroeconomic Variables: The Nigerian Experience” International Journal of Economics and Finance, 5(10), 18 – 35.

Okello, J. A. (2014). “Interest Rate Pass-through in Uganda” Bank of Uganda Working Paper No 2, 1 – 20.

Oyadeyi, O., & Akinbobola, T. (2020). Financial Development and Monetary Transmission Mechanism in Nigeria (1986-2017). Asian Journal of Economics and Empirical Research, 7(1), 74 – 90.

Oyadeyi, O. (2022a). Interest Rate Pass-Through in Nigeria. Journal of Economics and Development Studies, 10(1), 49 – 62.

Oyadeyi, O. (2022b). A systematic and non-systematic approach to monetary policy shocks and monetary transmission process in Nigeria. Journal of Economics and International Finance, 14(2), 23 – 31.

Oyadeyi, O.O., & Akinbobola, T. (2022). “Further insights on monetary transmission mechanism in Nigeria.” Journal of Economics and International Finance, 14(2), 11 – 22.

Oyadeyi O. (2023). “Financial Development, Interest Rate Pass-through and Interest Rate Channel of Monetary Policy.” Cogent Economics & Finance, 11:1, 2209952, DOI:10.1080/23322039.2023.2209952.

Roseline, N., Nyamongo, E. & Kamau, A. (2011). “Interest Rate Pass-through in Kenya” International Journal of Development Issues, 10, 170-182.

Sanusi, A. R. (2010). “Interest Rate Pass-Through and the Efficiency of Monetary Policy in Nigeria: 2002-2010” A Paper Submitted for Presentation at the 1st National Conference on State of The Nigerian Economy, Held at M. A. Auditorium, Bayero University, Kano, Nigeria.

Scholnick, B. (1996). “Asymmetric Adjustment of Commercial Bank Interest Rates: Evidence from Malaysia and Singapore” Journal of International Money and Finance 15(3): 485 –496.

Siakoulis, V., Petropoulos, A., Lazaris, P. & Lialiouti, G. (2018). “Interest Rate Pass-Through in The Euro Area: Are Policy Measures Efficient in Crisis Periods? Evidence from A Multi State Markov Model on a Panel Dataset” 2nd Annual Workshop of ESCB Research Cluster 3, organized jointly by the Bank of Greece and the European Central Bank.

Siklar, I., Dogan, E. & Dinc, M. (2016). “Interest Rate Pass Through in Turkey: The Measurement of the Monetary Transmission Mechanism Dynamics” Journal of Business & Economic Policy 3(4), 38 – 45.

Sweiden, O. D. (2011). “Interest Rate Pass-Through: The Case of Jordan” Ekonomska istraživanja, 24(1), 13 – 27.

Tai, P. N., Sek, S. K., & Har, W. M. (2012). “Interest Rate Pass-Through and Monetary Transmission in Asia.” Faculty of Accountancy and Management Universiti Tunku Abdul Kahman Bandar Sungai Long, 43000, Selango Malaysia.

Van Leuvensteijn, M., Sørensen, C. K., Bikker, J. A. & Van Rixtel, A. (2008). “Impact of Bank Competition on the Interest Rate Pass-Through in the Euro Area.” Banco de España Working Paper Series, Documentos de Trabajo. N.º 0828.

Von Borstel, J., Eickmeier, S. & Krippner, L. (2015). “The Interest Rate Pass-Through in the Euro Area During the Sovereign Debt Crisis” Reserve Bank of New Zealand Working Paper No, 3, 1 – 51.

Yilmaz, A. B., Yergin, H. & Oğrak A. (2018). “An Application on Interest Rate Pass-Through In Turkey” International Journal of Humanities and Social Science Invention, 7(6), 74 – 83.