Implications of Monetary Policy for Banks’ Assets in Nigeria

Abstract

Monetary policy is implemented with the main objective of economic stability and banks are the primary channel through which this policy influences economic variables. It is argued that the extent to which monetary policy goals are attained is predicated on the responsiveness of banks to it. The study therefore investigates the implications of monetary policy for Nigerian banks. To ascertain the influence pattern of monetary policy on banks, the study uses monetary policy rate and lending rates as monetary policy proxies. While banks asset is represented in the model by aggregate bank lending. Correlation and regression analyses were used to analyze data. The correlation result showed a negative relationship between aggregate bank lending (AGL), monetary policy rate (MPR), lending rate (LDR) and inflation rate (IFR). The regression analysis result confirms this, as monetary policy rate (MPR) relates negatively with loans in Nigeria. This means that the raising of the MPR and the attendant increases in lending rates will deter borrowers. The negative relationship between AGL and IFR, which is contrary to expectation, denotes the existence of a weak link between bank loans and the general market prices. The study concludes that monetary targeting could be effective in Nigeria in influencing bank lending but plays little role in inflation control and suggests refocusing on inflation targeting.

Keywords: Monetary policy rate, lending rate, inflation, bank loans, loan portfolio