An Empirical Analysis of the Determinants of Interest Rate in Nigeria (1981 -2021)

The aim of this study is to empirically investigate the determinants of interest rate in Nigeria. The treasury bill (TRb) was used as a proxy for interest rate. Other variables used for the study are the real gross domestic product (RGDP), money supply (Ms), and the rate of inflation (Inf). The data were all sourced from the Central Bank of Nigeria statistical bulletin. The Augmented Dickey Fuller unit root test was used to ascertain whether or not the dataset are stationary while the Pearson correlation matrix was used to test the degree of association between the dependent and independent or explanatory variables in the specified model. Findings from the study show that there is strong negative relationship between money supply and interest rate. The real gross domestic product has inverse or negative relationship with the rate of interest which is in consonance with apriori expectation. The coefficient of inflation indicates weak positive correlation between inflation and interest rate which is at variance with economic theory. The outcome however, was attributed to the global market for capital in which the interest rate is determined via the interaction between global investment demand and desired savings. Based on the findings, the following conclusions were made; The money supply especially the (M2) components are a veritable tool that can be used in tinkering the interest rate geared towards achieving targeted macroeconomic objectives; There should be proper cohesion in the use of monetary and fiscal policy in directing the interest rate to ensure that it positively boost the country’s real gross domestic product; other trade policies such the exchange rate policy should be monitored to ensure that it captures external factors that can potentially affect the domestic interest rate.