The Effect of Interest Rate Spread on Savings, Investment and Private Consumption in Nigeria

Abstract

The study investigates the effect of interest rate spread on savings, investment and private consumption expenditure in Nigeria from 1980-2015. The study adopted the Ordinary Lease Square (OLS) model. The study tested for descriptive statistics, unit root where all variables are integrated of order one I(1), the effect of interest rate spread on savings, investment and consumption and the short-run ECM model. The study found that interest rate spread has positive and significant effect on savings, investment and private consumption. For a percentage point change in interest rate spread, savings increases by 6.6 percent, investment increases by 8.4 percent and consumption by 1.1 percent. The study concluded that there is a significant relationship between interest rate spread on savings, investment and private consumption in Nigeria. Base on the findings, the study recommended that the Central Bank of Nigeria should put in place measures to monitoring interest rate spread related measures such as lending rate, deposit rate, operation efficiency, liquidity risk, provision and gross domestic rate to boost financial system in Nigeria. The study further recommends that government should strengthen collaboration with financial institution to put appropriate policies and strategies in place to reduce banks’ lending rate.