The Nigeria Inter Bank and Monetary Policy Rates Nexus: Any Discernable Long Run Relationship?
Inter bank markets are among the most important in the financial system. They are the focus of central banks" implementation of monetary policy and have a significant effect on the economy. Transactions in the inter bank funds market provide signal of what obtains in the open credit market. To provide for stability in short term interest rates, the Monetary Policy Rate (MPR) as the ,operating instrument" serves as an indicative rate for transactions in the inter bank money market as well as other deposit money banks' (DMBs) interest rates. It is this relationship between the inter bank and the monetary policy rates that this paper examined. The findings indicate that the rates are cointegrated and have a long run relationship, judging from the significance of the unit root test for the residual and the coefficient of the error correction variable in the error correction model. It is, however, the submission of this paper that much more investigation is needed on a number of issues such as the effect of liquidity hoarding in the inter bank market spread, and the impact of possible lending relationships between banks in the market on flow of funds and the inter bank rate, among others. These issues may provide significant insight on the behaviour of the Nigerian inter bank rate.