Monetary Policy and Stock Market Performance in Nigeria

A higher monetary policy rate leads to a higher lending rate, which in turn lowers the appeal of capital market investment and causes volatility in security values. The effect of monetary contraction, which includes a reduction in bank deposits and securities holdings, a lagged decrease in bank loans, and measures of aggregate output responding to monetary impulses with a similar lag, is said to be the reason why firms whose loan sourcing potentials are eroded by high interest rates experience some adjustment costs as interest rates rise. A causal relationship between the variables and the possible effects of monetary policy on Nigerian stock market performance were both investigated in this study. The Capital Asset Pricing Model and secondary sources from the Central Bank of Nigeria’s time series data from 1981 to 2022 were used in the study. An ex-facto research design was also utilised, and the analysis was conducted using the vector autoregressive model technique. A gauge of monetary policy was the performance of the stock market. The general money supply, interest rate, and exchange rate are the explanatory factors. Interest rates and monetary policy were discovered to have a major impact on stock market performance. Lower interest rates were found to frequently promote stock market activity because they make borrowing more affordable, which in turn encourages investment and may raise stock prices. In order to promote sustainable economic growth, preserve currency stability, and attract investment, stable and consistent economic policies are also essential. In light of the results, the study suggests that central banks give clear communication about their policy goals top priority in order to guarantee that markets comprehend the reasoning behind their choices.