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The Impact Of Interest Rate On Other Selected Macroeconomic Variables In Nigeria (1970-2010)
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Interest rates play important role in controlling major macroeconomic variables. The primary role of interest rate is to help in the mobilization of financial resources and to ensure efficient utilization of resources for the promotion of economic growth and development (CBN 1970).
However, they are various states of interest rates in the financial system. They are generally classified into two categories: Deposit and lending rates. Deposits rate are paid to savings and time deposits of different maturities, while lending rates are interest rates charged on loans to customers and they vary according to cost of loanable funds and lending margins.
A number of factors influence the behaviour of interest rates in an economy. Prominent among these are the volume of savings, inflation, investment, government spending, monetary policy and taxation constitute the major source (supply) of credit while investment represents the major demand
for credit. Therefore, the level of savings partly determines the level of interest rates. For instance, a decrease in the accumulation of loanable funds (savings) is bound to exert an upward pressure on interest rates, just as the reverse situation would tend to have a moderating effect. Usually, when the structures of interest rate are changed, the resulting relative rates of return will induce shift in the assets portfolio of both banks and the non-banks public institutions. Hence, the direction and magnitude of changes in the market interest rates are of primary importance to economic agents and the policy makers.
Consequently, the Nigerian Economy has been highly prone to interest rate volatility and fragility (CBN, 2000). Interest rates of all instruments have experienced very volatile movements. Inconsistencies have been the order of the day (Adewunmi, 1997).
Prior to the structural adjustments programme (SAP), the level and structure of the interest rates were administratively determined by the Central Bank of Nigeria (CBN). Both deposits and lending rates were fixed by the bank, based on policy decision (CBN, 1962). At that time, the major reasons for administering interest rates were the desire to obtain social optimum resource allocation, promote orderly growth of the financial market and combat inflation in implementing the credit policy. During this time, the minimum rediscount rate which was very low, averaging about 7.25 percent between 1975 and 1985.
Also, preferred sectors could not access funds because financial institutions were unable to raise sufficient funds form the money market at the favoured concessionary rates (Staley and Morse, 1966). Within the general framework of deregulating the economy in 1986, in order to enhance competition and efficient allocation of resources, the CBN introduced a market based interest rate policy in August 1987 (CBN, 1987).The policy decision was not without controversy, and later,it was generally agreed that low interest rates did not encourage savings. It was feared that high interest rate which was likely to accommodate the deregulation of interest rates allowed banks to determine their lending and deposit rates according to market conditions through negotiations with their customers (CBN, 1987).
However, the minimum rediscount rate (MRR) which influenced interest rates continued to be determined by the CBN in line with changes in overall economic conditions. The MRR which was 15 percent in August 1987 was reduced to 12.5 percent in December 1987 with the objective of stimulating investment and growth in the economy (CBN, august 9, 2006). During the same period, the prime lending rates of commercial banks and merchant banks were on the average 18.0and 20.5 percents respectively. But following the need for moderate monetary expansion in 1989, the MRR was raised to 13.5 percent. It was also observed that there were wide disparities in the interest rates structure of the various banks.
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ABSRACT - [ Total Page(s): 1 ]This study was embarked upon with a view to determining the impact of interest rate on other selected macroeconomic variables in Nigeria. Data were sourced from CBN Abuja and NBS. Data were analyzed using the ordinary least square regression (OLS). Results indicate that: Interest rate is inversely related investment and also negatively related with GDP. On the basis of the above stated findings some policy recommendations were made.(1)Government should establish policies that encourage increase ... Continue reading---
