EFFECT OF INTEREST RATE ON ECONOMIC GROWTH IN NIGERIA

EFFECT OF INTEREST RATE ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

Government should provide an enabling environment for investment to be productive in Nigeria since real interest rate makes investment to go higher, that is investment is a kind of medium that links Investment and Economic growth. Secondly, Government should make policies both monetary and fiscal that will aid investment to be productive in other to be able to achieve the relationship between interest rate and economic growth and finally I recommend that the government and financial authorities should implement policies that favour income growth such as job creation and encouragement of small scale businesses which will in turn increase investment significantly

1.1 BACKGROUND OF THE STUDY

The effect of Interest rate on economic growth in Nigeria has been a matter of controversy over a long period of time. Yet, what constitutes an appropriate interest rate policy still remains a puzzling question. Until the early 1970s, the main line of argument was that because the interest rate represents the cost of capital, low interest rates would encourage the acquisition of investment and promote economic growth, a notion consistent with the Keynesian and neo-classical analysis. This promoted many countries to impose interest rate ceilings at below market clearing levels.

Interest rate is a prominent feature of any economy. Interest rate change in response to a variety of economic events such as change in federal policy, crises in domestic and international financial market and changes in the prospects for long term economic growth and inflation. However, economic events such as these tend to be irregular (Keith, 1996).

Interest rate reform, a policy under financial sector liberalization, was to achieve efficiency in the financial sector and engendering financial deepening. In Nigeria, financial sector reforms began with the deregulation of interest rate in august 1987 (Ikhide and Alawode, 2001).

EFFECT OF INTEREST RATE ON ECONOMIC GROWTH IN NIGERIA