EFFECT OF INTEREST RATE ON ECONOMIC GROWTH IN NIGERIA

EFFECT OF INTEREST RATE ON ECONOMIC GROWTH IN NIGERIA

Abstract

The government needs to create a favorable environment for investment to be productive in Nigeria, as higher real interest rates lead to higher investment. So investment is a kind of medium that combines investment and economic growth. Second, governments need to take both monetary and fiscal measures to help ensure that investments in others are productive so that the relationship between interest rates and economic growth can be achieved. I have. Income growth, such as job creation and incentives for small and medium enterprises, will significantly boost investment.

1.1 Research Background

The impact of interest rates on economic growth in Nigeria has long been debated. But what constitutes an appropriate interest rate policy remains a puzzling question. Until the early 1970s, the main argument was that low interest rates would help attract investment and boost economic growth, since interest rates represent the cost of capital. This has led many countries to introduce interest rate caps below market clearing levels.

Interest rates are a prominent feature of any economy. Changes in interest rates in response to various economic events, including changes in federal policy, crises in domestic and international financial markets, and changes in long-term economic growth and inflation prospects. However, such economic events tend to be irregular (Keith, 1996).

Interest rate reform, a policy under liberalization of the financial sector, should achieve efficiency in the financial sector and bring about financial deepening. In Nigeria, financial sector reform began with his August 1987 deregulation of interest rates (Ikhide and Alawode, 2001). Prior to this period, the financial system operated under financial regulation and interest rates were said to be repressed. According to McKinnon (1973) and Shaw (1973), financial repression arises mostly when a country imposes ceiling on deposit and lending nominal interest rates at a low level relative to inflation. The resulting low or negative interest rates discouraged saving mobilization and channelling of the mobilized savings through the financial system. This has a negative impact on the quantity and quality of investment. Therefore, the expectation of interest rate reform was that it would encourage domestic savings and make loanable funds available in the banking institutions. But the criticism has been that the “tunnel-like” structure of interest rate (Ojo, 1976) in Nigeria is capable of discouraging savings and retarding investment.