Interest Rate Pass-Through and the Efficiency of Monetary Policy in Nigeria: 2002-2010

Abstract

This paper estimates magnitude and speed of the interest rate pass-through for Nigeria using a monthly data for the period 2002:M1-2010:M04. It uses the Impulse Response Functions from a Structural Vector Auto-Regression (SVAR) model of the interest rate transmission to derive the dynamic elasticities of the pass-through of monetary policy rate and interbank interest rates to the retail lending and deposit interest rates. The major findings are: (1) Interest rate pass-through in Nigeria is incomplete and quite slow, consistent with the general findings in the literature. (2) Although incomplete, the pass-through of monetary policy rate to interbank money market rates is substantially larger and faster than they are the retail lending and deposit rates. (3) There is some evidence of signalling effects of the policy rate changes on money market rates, but not on retail rates. (4) While the pass-through to the money market rates increased substantially in the post-consolidation period (2006-2010), the pass-through to the retail lending and deposit rates actually decline relative to the pre-consolidation period (2002-2005). This, we argue, implies that while the banking and financial sector reforms have succeeded in increasing the efficiency of the wholesale money market, they failed to remove the distortions in the retail loans and deposit markets. These distortions in the retail loans and deposit market will continue to render monetary policy ineffective and inefficient. A major recommendation from this paper, therefore, is that the Central Bank of Nigeria must concentrate its efforts in reducing the distortions in the retail loans and deposit markets.