Interest Rate Pass-through from Wholesale Rate to Deposit Money Banks Retail Rates in Nigeria: An ARDL Approach

Abstract

The paper investigates interest rate pass-through from wholesale rate to seven types of Deposit Money Banks (DMBs) retail rates. The justification for the study is to discover what we have learnt about the changes in the interest rate pass-through from the whole sale rate to intermediate rates after the capital reform of 2005. Evidence from the study will also aid monetary policy decisions for macro-economic management in Nigeria. We use monthly data for the period 2006M01-2015M01 based on ARDL approach. Our findings reveal that Interest Rate Pass-through (IRPT) affects DMBs products differently. In the case of deposit rates, pass-through is near complete in the short run for all products except for 12month deposit rate. In case of lending rates, the prime lending rate pass-through was complete while the maximum lending rate was incomplete. The bounds test suggest the existence of a long-run relationship between the variables such that the speed of adjustment takes an average of 16 months for deposit rates and 7months for prime lending rate before they return to their equilibrium positions. Based on the findings that pass-through of wholesale rate to DMBs retail rates is sufficiently high during the month, we conclude that monetary policy is reasonably effective in determining changes in the intermediate target in the short-run in Nigeria

Keywords: pass-through, wholesale rate, deposit rate, lending rate, deposit money banks