Do oil prices forecast the interbank market interest rates in Nigeria?

Abstract

We aim to establish the nexus between crude oil price and the interbank interest rate in order to ascertain if crude oil prices possesses a predictive ability on the interbank interest rates in Nigeria by using monthly series ranging from 2002:1 to 2021:12. The result of the Johenson Conitegration test indicated the existence of a long-run relationship between interest rate and crude oil prices, the variance decomposition and impulse response function results trace the behaviour of  interbank interest rate as accounted by shocks on  oil prices. The test of volatility using GARCH (1,1) confirmed that volatility was quite persistent while the Granger Causality test confirmed that oil price granger caused interbank interest rate. Finally, the forecast of interbank interest rate using structural autoregressive moving average (SARMA) revealed that oil price adequately forecast the behaviour of interbank interest rate. It is therefore recommended that policies in tackling the impact of fluctuations in oil prices should be formulated which will serve as an important source of stabilizing the movements in the interbank interest rate. Considering the importance of oil to the development and growth of the Nigerian economy, a focus to diversify the Nigerian economy away from over-dependence on oil revenue to other productive sectors of the economy using the financial receipts from crude oil will help to stabilize the interbank rates.