State-administered and Market-driven Loan Rates Adjustment to Change in the Monetary Policy Rates in Nigeria

ABSTRACT

Background and Objective: Understanding the dynamics of interest rate pass-through is fundamental for the conduction of monetary. The importance of the interest rate in an economy is that the loan rates directly affect the behaviour of households and businesses, which in turn, influences economic growth, inflation, and thus the monetary policy. This paper empirically examined the interest rate pass-through between the central bank policy rate and the commercial bank's loan rates in Nigeria for the pre-liberalization sample (1962-1987) and post-liberalization sample (1987-2018). Materials and Methods: The asymmetric cointegration technique was employed to analyse the data. Results: Results from the threshold cointegration tests between interest rates for the pre-liberalization period exhibits symmetric behaviour. The results also revealed evidence of nonlinear cointegration between the policy rates and retail loan rates in a form of upward rigidity during the post-liberalization period. Conclusion: Results suggested that asymmetric behaviour affects the transmission mechanism of monetary policy, the indicative policy suggested the need for monetary policy-makers to consider such banks behaviour in the future policy formulation.