THE IMPACT OF COMMERCIAL BANK LENDING RATES ON INFLATION IN NIGERIA (1985-2004)
This study, “the impact of commercial Banks lending rates on inflation in Nigeria was conducted mainly to investigate the impact of changes in bank lending rates on inflation in Nigeria between 1985-2004. The study covers the Nigerian economy. A quantitative assessment of the deregulated interest rate and inflation rate during the period was undertaken using simple regression techniques. Both the descriptive and the quantitative analysis seem to indicate that changes in Bank lending rate have caused inflation in Nigeria within the period under review. The hypothesis was tested to back up the claims that changes in bank lending rates have no significant impact in inflation in Nigeria.
To this, the null hypothesis (Ho) was rejected and the alternate hypothesis (Hi) was accepted that changes in bank lending rate has significant impact in inflation from the period under review. The researcher ended up with the following findings: That there is a correlation between interest rate and inflation, That high interest rate and infact, the failure of any country to pursue an optimum interest rate policy can distort macro-economic parameters and cause serious damage to the country’s economic development, That the basic problem in Nigeria today is not the making of policies but the implementation, The researcher also reveals that with the deregulation of interest rate in the period under study, the financial system has been inefficient in the sense that funds mobilization has failed finally, it has been observed that, there are other exo-genous factors that can affect inflation in Nigeria other than, interest rate.
On the strength of the above findings, the researcher puts forward the following recommendations:- That, an administrative fixed interest rates should be revitalized, that is, a strictly regulated interest rates philosophy to be reintroduced. Despite this, the monetary authorities (CBN) should also adopt more drastic punitive measures to stem the disparity in the rates which are charged on loans within the same economic vicinity. In addition, the guidelines of the financial system should not be left to the interplay of the market forces to determine who get what at what rate. But, if the deregulation must be retained or if it is compulsory, then deregulation should be operating within the framework of some measures of checks and balances by the monetary authorities. This implies that, deregulation should not be left to the inter play of the market forces alone, financial institutions must be brought back into the loop of monetary ease and restraint.
1.1 Background of the Study
Prior to July 3rd, 1987, interest rates in Nigeria were directly controlled by the monetary authorities. This however, was based on expert advice in the absence of a well-developed financial markets CBN (1998:2). Under this system, the government would set the deposit and lending rates of the financial intermediaries at their prevailing levels, and also the rates for lending to special and specified sector. In July 1987, all these were abolished and since the introduction of the deregulation policy in the country, inflation has been on the increase. Measures to control this always proved negative since the constitutional structures as well as theoretical frameworks borrowed from Western countries are no longer applicable in our Nigerian perspective.
The purpose for this study is to investigate the deregulated interest rate and its impact on inflation within the period under study. This is because, inflation has been recognised as a social ill that blows no one good in the society. It is a problem that has often proved difficult to tackle largely because any meaningful attempt at curing it would entail a trade-off among other important macro-economic and social objectives such as increased employment, economic growth and other social safety nets (CBN, 1998).
It is however, noted that the price of all goods and services may not rise simultaneously or by the same proportion. Note that, an increase in the price level may not depict an inflationary phenomenon but if the situation is sustained, then inflation is implied with serious consequences for macro-economic stability, Okorie (1993:34).
The rate of price increase, that can constitute a problem is as stated by Johnson (CNB, 1978:57) “a political question determined by public opinion”. But this however, varies among countries over time within a country. As is the case of interest rates, it is said to be one of the most major economic device, which has been devised to regulate and control the volume and cost of money as well as dictate direction of credit that must be paid to get people to forego willingly the advantage of liquidity. It is also said to be the price, which must be paid for the right to borrow loanable funds. Interest rates are classified as normal (market) and real interest rate respectively. The normal interest rates are the interest rate actually paid while real interest rates are nominal minus expected rate of inflation. Hence, the nominal rates of interest refers to the real interest rates plus the rate of interest in the price level (Samuelson, 1976).
For an economy to achieve a rapid and sustainable growth and development depend on its monetary policy which is referred to as the combination of measures designed to regulate the value supply and cost of money in an economy. An excess supply of money for instance, would result in an excess demand for goods and services which would cause inflation and at the same time deteriorate the balance of payment position. On the other hand, an inadequate supply of money would induce stagnation in the economy thereby retarding growth and development.
Economists have at various times shown the correlation between interest rate and inflation, consumption and saving, e.t.c It is generally accepted that, a high lending rate discourages investment, brings a fall in saving, fall in income and consequently will reduce corruption. Conversely, it is also believed that, high rate of interest on savings will induce saving, fall in lending rate, induced investment, increases income, increase consumption and at the long run brings about inflation in the economy. Thus, interest rate serves as the rationing devices that allocate scarce capital funds in an optimal manner among competing investment project (CBN, 1998). The primary roles of interest rate are to help in the mobilisation of financial resources and to ensure the efficient utilisation of such resources in the promotion of economic growth and development.
The deregulation of interest rates came into effect in August 1987 as a policy instrument of SAP. This was to enhance the development of financial system in the economy and to further accelerate the attainment of the objectives of SAP. Deregulation here can be said to be a deliberate and systematic liberalisation of the structural and operational guidelines under which the economic units has been thriving (Anyanwu, 1987). This essentially indicates that from then on, the interest rates were to be
determined by the market forces (that is, forces of demand and supply of loanable funds).
THE IMPACT OF COMMERCIAL BANK LENDING RATES ON INFLATION IN NIGERIA (1985-2004)
Nigerian economy recently witnessed a high degree of liberalisation which started with the foreign exchange market under the Structural Adjustment Programme (SAP) of 1987. This was followed by the deregulation of interest rate and then the capital market. The implication is that, the forces of demand and supply (market forces) or the invisible hands of the market” according to Adam Smith, will determine who gets what and at what rate in the foreign exchange market, money market and capital market. The deregulation exercise has witnessed more frequent changes especially in the foreign exchange rates and interest rates than before, and thus has led to the ever increasing rate of inflation in the economy. The high and unstable rates of interest have resulted to tremendous increase in the cost of production which is generally reflected in the high cost of consumers’ goods. As such, government however, put a question mark on its belief in the efficiency of the market forces as regards interest rates when in 1991 fixed minimum rate to be paid on deposits and maximum lending rate for the banks. But the big question now is, to what extent has the deregulation of interest rate affected the price of commodities in the country? Or its impact on inflation? This research paper therefore, seek to provide answers to this important question.
In the final analysis of this research work however, one will be able to identify why the deregulated interest rates rather than achieve growth and development has instead, brought about inflation and why our policy makers are finding it difficult to solve the crisis.