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Volume 11 Issue 3, July-September 2023 

ISSN: 2836-9416 

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EVALUATING MONETARY POLICY EFFECTIVENESS: INTEREST 
RATE PASS-THROUGH IN NIGERIA 

 
 

Dr. Adeola Oyadeyi 
Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria. 

 
Abstract: Interest rate pass-through, the transmission of central bank policy rate changes to retail 
bank lending and deposit rates, is a crucial indicator of the effectiveness of monetary policy. This study 
examines the interest rate pass-through mechanism in the context of Nigeria's monetary policy 
framework. In December 2006, Nigeria adopted a new monetary policy approach, replacing the 
minimum rediscount rate with the monetary policy rate and introducing an asymmetric corridor 
around this rate. The primary aim was to target the overnight rate and enhance monetary policy 
effectiveness. 
This research explores the relationship between the policy rate and retail bank lending and deposit 
rates, with a focus on the interbank market. It assesses the extent to which changes in the policy rate 
influence these rates in the short term. A comprehensive analysis of interest rate pass-through is 
essential for understanding the efficacy of Nigeria's monetary policy in controlling inflation, stimulating 
economic growth, and maintaining financial stability. 
Our findings contribute to the ongoing discourse on monetary policy in Nigeria, shedding light on the 
interplay between central bank actions and retail banking rates. Understanding interest rate pass-
through is vital for policymakers and financial institutions seeking to navigate the intricacies of 
monetary policy and achieve macroeconomic stability. 
Keywords: Interest rate pass-through, monetary policy, policy rate, retail bank rates, Nigeria, 
interbank market. 
  
1. Introduction 
Interest rate pass-through is a description of how the retail bank lending and deposit rates respond to 
changes in the policy rate. Monetary policy is therefore completely effective if the retail and deposit 
rates respond and adjust completely to changes in the policy rate within the short term (Ahmad, Aziz, 
and Rummun, 2013). In December 2006, the Central bank of Nigeria introduced a new monetary policy 
framework by replacing the minimum rediscount rate with the monetary policy rate. This policy 
introduced an asymmetric corridor around the policy rate and there was a shift in policy focus to 
targeting the overnight rate (Mordi and Adebiyi, 2014). According to Ewerhart, Cassol, Ejerskov, and 
Valla (2004), there is a close link between the interbank rate and the policy rate. This is because the 
standing deposit and lending facilities of the central bank provide an alternative source of banking 
sector liquidity compared to the interbank market. Therefore, the interbank rate is expected to move in 
tandem with the policy rate.  

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Several studies in the literature have examined the potential effectiveness of interest rate pass-through. 
Some of these studies have found an incomplete pass-through (Binning, Bjornland and Maih, 2017, 
2019; Mahmood, 2018; Sanusi, 2010), while some have found a complete pass-through (Grigoli and 
Mota, 2017; Mbowe, 2015), and the rest had mixed results (Ahmad, Aziz, and Rummun, 2013; Belke, 
Beckmann and Verheyen, 2012). The reasons for an incomplete pass-through according to the literature 
(that is, the demand elasticity of deposits and loans being less than one) can be linked to alternative 
sources of financing and investments such as investment in government securities (treasury bills and 
bonds) of similar maturities or equity financing (Bangura, 2011; Lerskullawat, 2014). Other reasons 
may include the role of asymmetries, a high cost of changing banks (switching costs), and a highly 
concentrated banking system (De Bondt, 2002, 2005). The monetary authorities in Nigeria have been 
using interest rates as its main policy anchor in line with an inflationtargeting framework, but the few 
studies to consider the extent and effectiveness of interest rate pass-through in Nigeria have focused on 
shorter periods (Sanusi, 2010), or using annual data in computing the pass-through (Ogundipe and 
Alege, 2013), or a comparative analysis (Fomum, 2011).   
However, a recent study to consider interest rate pass-through in Nigeria focused on the pass-through 
from the policy to the retail rates using a structural break approach (Mordi, Adebiyi, and Omotosho, 
2019). In light of the above, this study extends the literature in four main areas. First, the study 
examined the effectiveness of the policy rate on the interbank (money market) and retail lending and 
deposit rates, and the effectiveness of the interbank rate on the retail lending and deposit rates since 
the adoption of the monetary policy rate as the policy anchor. Second, the study considered the role of 
asymmetries in computing the time taken for a change in a central bank’s interest rate to fully reflect 
on the interbank, retail deposit, and lending rates. Third, the study considered the short and long-run 
dynamic adjustment of two interbank rates and seven retail rates, extending the number of rates 
covered in previous studies. Finally, the study using monthly data, adopted an up-to-date time frame 
compared to previous studies (Sanusi, 2010; Fomum, 2011; Ogundipe and Alege, 2013) to capture 
recent events in the economy, such as the 2007 capital market splurge, the 2008 financial crises, the 
periods of fallen crude oil prices and the periods of recession and post-recession. The aim was to 
examine the effectiveness of interest rate pass-through in Nigeria since the monetary policy rate was 
introduced.   
An important reason for observing the effectiveness of interest rate pass-through is because if retail and 
money market rates are perfectly responsive to the policy rate, the economy may be able to achieve its 
full potential. However, an incomplete pass-through may lead to failure on the part of the monetary 
authorities to stabilize shocks within an economy (Tai, Sek, and Har, 2012). Therefore, the magnitude 
and speed of these adjustments will determine whether the monetary authorities’ interest rate policies 
have been effective or not since an effective pass-through is required for effective economic stabilization 
and inflation control under an inflation targeting strategy.  
2. Literature Review  
This paper briefly discussed what previous authors have done regarding the topic. The review starts 
with Liu (2019) whose study examined interest rate pass-through in China and the major determinants 
of lending rates in China. The study found some evidence of interest rate pass-through in China from 

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American Research Journal of Economics, Finance and Management 

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money market rates to lending rates; however, this pass-through was negatively affected by shadow 
banking activities, commercial banks’ asset quality as well as macroeconomic activities. Mueller-Spahn 
(2008) empirically examined interest rate passthrough from the capital and money market to retail 
bank rates in Germany. The study found an incomplete passthrough from the capital and money market 
rates to retail banking rates in Germany. Frisancho-Mariscal and Howells (2011) examined interest rate 
pass-through and risk in the UK since the period of the global financial crises. The study found that the 
aftermath of the crises affected deposit rates compared to lending rates, leading to higher interest rate 
spreads in the UK. Ahmad, Aziz, and Rummun (2013) in a similar study on the UK found an incomplete 
pass-through from the Libor rate to four different retail rates in the short run and a fairly complete 
pass-through in the long run.   
Brunnermeier and Koby (2019) examined the impact of reversal interest rates in Europe using a DSGE 
framework. The study found out that quantitative easing raised the reversal interest rates and therefore, 
quantitative easing measures should only be employed if interest rate cuts have been exhausted. 
Binning, Bjornland, and Maih (2017) also examined interest rate pass-through using a DSGE 
framework. The study found that there was no short-run pass-through, however, pass-through tended 
to be incomplete in the long run. Similarly, Binning, Bjornland, and Maih (2019) also found the same 
results in their recent study on interest rate pass-through via a DSGE framework. However, Gregor, 
Melecký, and Melecký (2019) carried out a meta-analysis of the literature on interest rate pass-through. 
They found a lower pass-through in countries that focused on longterm lending rates, while they 
showed that pass-throughs are more effective in countries that have a welldeveloped financial market 
and deeper capital markets. Gigineishvili (2011) examined the importance of macroeconomic and 
financial market conditions on the interest rate pass-through process in low-income, advanced, and 
emerging countries. The study showed that GDP per capita and inflation were major determinants of 
interest rate pass-through, while banking competition, credit quality, and overhead costs strengthened 
the interest rate pass-through in all the examined countries.  
Von Borstel, Eickmeier, and Krippner (2015) examined interest rate pass-through in the Euro area 
during the periods of sovereign debt crises. The study found that unconventional monetary policies 
were useful in reducing lending rates in Europe, while conventional monetary policies were unable to 
lower banks’ marks up. Similarly, Darracq-Paries, Moccero, Krylova, and Marchini (2014) found out 
that a well-developed financial market devoid of fragmentations is necessary for an effective pass-
through. Furthermore, Van Leuvensteijn, Sørensen, Bikker, and Van Rixtel (2008) found more 
competition in the bank loan market compared to her deposit market and they also found a stronger 
pass-through in more competitive economies in the Euro area.   
Also, De Bondt (2002) found interest rate pass-through to be more effective in the long term compared 
to the short term, with the lending rate adjusting faster to the money market rate compared to the 
deposit rate in the Euro area. While Belke, Beckmann, and Verheyen (2012) examined interest rate 
pass-through in EMU countries with mixed results. And most of the European monetary union 
countries had an incomplete passthrough. Siakoulis, Petropoulos, Lazaris, and Lialiouti (2018) also 
found a lower pass-through during periods of financial crises, and also found interest rate pass-through 
to be determined by sovereign risk and the financial system of individual country members.  

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In the emerging world, Siklar, Dogan, and Dinc (2016) empirically examined interest rate pass-through 
in Turkey and the resulting pass-through on output and prices. The study although found an incomplete 
passthrough on retail rates, also had values larger than the pass-through from policy rate to output and 
prices, which were generally low on the series. Amatyakul, Taerat, Visudtiko, and Wongwachara (2019) 
examined the passthrough using the new loan rate and minimum loan rate as the policy rate in 
Thailand. The study found a more effective pass-through from the new loan rate compared to the 
minimum loan rate. Furthermore, the results showed that firms with large assets and stronger banking 
relationships had a stronger pass-through, while banks with relatively liquid balance sheets had a 
weaker pass-through. Finally, the study showed that the agricultural sector loans barely responded to 
an induced policy rate change; however, loan rates attached to the manufacturing sector changed in 
line with the induced policy rate change. Bogoev and Petrevski (2012) under a fixed exchange rate 
system checked the interest rate pass-through in Macedonia. The study found that the monetary 
authorities may witness a limited impact in the short-run, with a slow speed of adjustment. In the long 
run, however, interest rate pass-through was found to be almost complete.  
Yilmaz, Yergin, and Oğrak (2018) examined interest rate pass-through in Turkey and found a stronger 
and higher pass-through on the retail interest rates in all cases. Miletic and Tasic (2015) focused on 
corporate and household loans in Serbia and they found an incomplete pass-through to corporate and 
household loans in the long run in Serbia. Grigoli and Mota (2017) found a complete pass-through from 
the policy rate to the lending and deposit rate in the Dominican Republic. However, Sweiden (2011) 
found a faster pass-through on deposit rates compared to lending rates in Jordan. Jiri and Martin 
(2018) for the Czech Republic found a complete passthrough to SME lending but did not find a pass-
through for consumer lending. Antao (2009) showed that interest rate pass-through to loans was 
complete in the long run for Portugal, while it had an incomplete pass-through with a considerably 
higher degree to deposits. Finally, the study showed that deposit interest rates adjusted faster to 
equilibrium compared to the lending rates for Portugal.  
Ansari (2013) empirically investigated India’s interest rate pass-through with regulatory requirements. 
The study found out that there could be a trade-off between regulations and the effectiveness of money 
transmission and that banks can subsidize loans rather than invest in government securities. Hsu 
(2017) also studied the interest rate pass-through in seven Asian economies. The study found the 
lending rates to be stickier, that is, less responsive to the policy rate compared to the deposit rates. 
While the study found that the pass-through is stronger in more developed economies. Furthermore, 
Mahmood (2018) found an incomplete pass-through for Pakistan. The study also found out that interest 
rates were sticky towards a downward adjustment compared to an upward adjustment. 
Mangwengwende, Chinzara, and Nel (2011) investigated the link between bank concentration and 
interest rate pass-through in four Sub-Saharan African countries. The study evidenced some 
relationships between the concentration of banks and the pass-through in these four countries. The 
study also showed that bank concentration influenced the magnitude, rather than the speed of 
adjustment. The study finally supported the structure conduct performance hypothesis and the efficient 
structure hypothesis.  

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In Sub-Saharan Africa, Mbowe (2015) examined the pass-through in Tanzania, with a major focus on 
the pass-through from the policy rate to lending rates. The study found a complete pass-through to the 
interbank rate, while it found a weak and incomplete pass-through from the policy rate to the deposit 
rate. However, Aziakpono and Wilson (2013) found a considerably higher degree of pass-through in the 
retail rates in South Africa. Ogundipe and Alege (2013) examined interest rate pass-through on retail 
rates and the macroeconomy at large in Nigeria. The study found out that there was a slow and 
incomplete pass-through; however, the pass-through was slower and weaker on output and prices 
compared to retail interest rates. Sanusi (2010) on Nigeria found interest rate pass-through to be 
characterized by an incomplete degree of pass-through from the policy rate to the interbank and retail 
lending and deposit rates, however, with a higher degree from the policy rate to the interbank rate 
compared to the retail lending and deposit rates. The study also showed a higher pass-through to the 
interbank rates post-consolidation, but the pass-through to retail rates was weaker pre-consolidation. 
This outcome of an incomplete interest rate pass-through to the lending and deposit rates was 
reinforced by similar studies such as Okello (2014) in Uganda, Fomum (2011) on Nigeria and 
Cameroon, and Mordi, Adebiyi, and Omotosho (2019) using a structural break approach in Nigeria.  
In summary, the reviewed studies showed that interest rate pass-through in the examined countries 
has mixed outcomes, with some studies exhibiting an incomplete, complete, or overshooting pass-
through. Hence, this paper will examine interest rate pass-through from the period of the 
implementation of the Monetary Policy Rate (MPR) as the policy anchor in Nigeria. This is to determine 
the effectiveness of the policy rate on the money market and retail rates. The rest of the paper is 
designed as follows. Section three discusses the approaches to arrive at the objectives. Section four 
analyses and discusses the results, while the final section concludes the paper with some 
recommendations.  
3. Methodology  
Our conceptual framework starts from the Monte-Klein model for bank profit maximization. This 
model has been previously used by Mbowe (2015) and Roseline, Nyamongo, and Kamau (2011). 
According to the framework, commercial banks have a direct relationship with the central banks and 
therefore, maximize profit visa-vis their balance sheet. From the balance sheet, assets and liabilities 
must be equal. Loans and reserves are on the asset side, while deposits and settlements with the central 
bank are on the liability side of the balance sheet. Computing this gives our first equation below.  
R L D S                   1  
Assume commercial banks grant loans at rate iL , pays for its deposits at rate iD , incurs cost of deposit 
and loans at mLand these banks perform clearing activities with the central bank, the banks with a 
negative settlement balance will therefore pay a fine iP equivalent to the policy rate.  The profit 
maximization function now becomes:  

(D,L) iLL iD(R L S) ip (S R) mL          2  
From the above, two options are being faced by commercial banks, which is the quantity of loans they 
give and the amount they choose to have as reserves. Therefore, differentiating equation 2 with respect 
to loans and reserves gives:  
iL iD m           3 iD i p          4  

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Combining equations 3 and 4 gives a linear relationship between the lending and policy rate.  
iL m i p                    5  
Hence, the first stage of interest rate pass-through, known as the monetary approach, will see a 
passthrough from the policy rate to the money market rate (interbank rate and other money market 
instruments), while the final stage, simply known as the cost of fund approach, will see a pass-through 
from the interbank rate to the retail interest rates (lending and deposit rates). Re-specifying equation 5 
into the pass-through from policy rate to money market rate and from the money market rate to retail 
rate gives:  
rit 0 1r pt t         6 rrt 1 2r it t         7 rrt 2 3r pt t         8  
 where equations 6, 7 and 8 represent the pass-through from the policy rate to the money market rate 
(interbank rate), the interbank rate to the retail rates (lending and deposit rates) and from the policy 
rate to the retail rates respectively. rpt represents the policy rate, rit represents the interbank rate and rrt 
represents the retail interest rate. t is independently and identically distributed with a mean of zero 
and a constant variance ( 2 ),  

n's are the mark-ups and n's measures the degree of interest rate pass-through. In essence, interest 
rate passthrough simply gives an explanation of the influence of the policy rate on the money market 
and retail interest rates in order to verify if the pass-through process is incomplete (0 n 1), 
complete ( n 1) or overshooting ( n 1) (Lerskullawat, 2014). By implication, the interest rate pass-
through measures the degree of responsiveness of the retail and money market rates to the policy rate. 
For a stationary series at level form, the above equations 6 to 8 will be adopted since the model is in its 
long run form; however, for series that have a unit root, the below short run model will be adopted to 
model interest rate pass-through.   
n m 

rrit 0 1 prpt k prpt k j rr it j t         9  
k 1 j 1 
It must be noted that equation 9 is a hybrid version of equations 6 – 8, depending on which pass-
through is being examined - where m and n are the maximum lags chosen and  represents the 
difference operator. Assuming cointegration exists among the observed variables in equation 9, then a 
dynamic adjustment that shows the speed of adjustment, via a short run disequilibrium to the long run 
equilibrium is then represented. Equation 10 thus depicts the short run and long run version of 
equation 9. n m 

rrit 0 1prt 1 prpt k prpt k j rrit j (rrt 1 prt 1) t  
 10  
k 1 j 1 
Where  is the speed of adjustment to the long-run equilibrium level and is the coefficient of the 
independent variable in the long-run. Therefore, the error correction co-integration test will be used to 
test whether  is statistically different from zero, which then implies that cointegration exists between 
the policy rate and retail rate (or interbank rate if we consider the policy rate and interbank rate). Once 
the error correction term is confirmed, the next step will be to confirm the number of months it will 
take for the retail rate to adjust to a change in the policy rate. This can be derived through the Mean 

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Adjustment Lag (MAL). While the error correction term will show the speed of adjustment within a 
month, the Mean Adjustment Lag will show the number of months required to reach long-run 
equilibrium (Mangwengwende, Chinzara and Nel, 2011). This implies that the mean adjustment lag will 
show the number of months it takes for the retail rates to fully adjust to a change in the policy rate. 
Thus, the mean adjustment lag is calculated as follows:  
1 n 
MAL                     11  

 
 

If the mean adjustment is high, then the adjustment process is slow and otherwise if the mean 
adjustment is low. The above description of the mean adjustment lag is termed the symmetric mean 
adjustment lag. However, there are cases when the mean adjustment lag is said to be asymmetric. 
According to Scholnick (1996), if residuals are above their mean, then they will tend to adjust 
downwards to the mean in the long run, while if the residuals are below the mean, then they will adjust 
upwards towards the mean. This concept brought about the asymmetric mean adjustment lag, which 
tells us how fast the retail rates fully adjust to the policy rate either upwards or downwards (Scholnick, 
1996). Consequently, the correction term is divided into two series (positive and negative) and is 
mathematically represented as follows:  
ECT EC,     if ECT   
ECT 0      If ECT   
And                        12  
  ECT EC     if ECT   
  ECT 0      if ECT   
where is the mean error correction and is equal to zero since it denotes the residual in the 
cointegration equation. By implication, a residual above the mean implies that the retail rate is above 
the equilibrium and must move downwards towards equilibrium, and otherwise, in the case of a 
residual below the equilibrium. Therefore, dividing the residual into two separate error correction 
terms gives the asymmetric mean adjustment lag. n m 
  rrit 0 1prt 1 prpt k prpt k j rrit j 1ECT 2ECT

lt  13  
k 1 j 1 
And the asymmetric mean adjustment lag will further be represented by:  

 1 1  
  MAL                    14  

 
1 

and  
 1 1  

  MAL                    15  

 

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2  
Equations 14 and 15 display the positive and negative mean adjustment lags, that is, the adjustment of 
the retail rates (or interbank rate) to the policy rate when these rates are above and below their 
equilibrium level. If the mean lags are seen to be different, then the adjustment process is also seen to 
be different.   
Finally, the Wald test will be used to test whether equations 14 and 15 are equal. If they are equal to 
zero, then the test series is said to be symmetric. However, the test series will become asymmetric if the 
two equations are not equal to zero. - that is, retail rates will adjust differently to a change in the policy 
rate.   
4. Analysis and Presentation of Results 
Several techniques were adopted to determine the effectiveness of interest rate pass-through in Nigeria. 
Some of these techniques include unit root tests, co-integration tests, error correction technique, 
autoregressive distributed lag model and symmetric and asymmetric mean adjustment lags. The 
essence was to ensure that the results generated are robust for relevant policy recommendations. 
Monthly data spanning December 2006 through December 2020 were sourced from Central Bank of 
Nigeria’s Statistical Bulletin (2021). The observed data include monetary policy rate, interbank call rate, 
open buy-back rate, prime lending rate, maximum lending rate, savings deposit rate, one-month 
deposit rate, three months deposit rate, six months deposit rate and twelve months deposit rates. From 
the descriptive statistics, the mean and median values showed a good level of consistency, while the 
skewers statistics showed that the policy rate, savings rate, three months and six months deposit rates 
were negatively skewed, while the rest were positively skewed. Furthermore, the kurtosis showed that 
interbank call rate, open buy-back rate, one-month deposit rate and prime lending rate were 
leptokurtic, while the other variables were platykurtic. The Jarque-Bera statistic showed that the one 
month, three months, six months and twelve months deposit rates and the maximum lending rate 
followed a normal series. The essence of examining the data presented in table one is because it depicts 
interest rates at every segment of the market, such that the money market is duly represented with the 
interbank call interest rate and open buy-back rate and the retail rate is represented by the deposit and 
lending rates.   
Table 1: Descriptive Statistics  

   MPR   ITBC   OBBR   SDR   1MDR1   3MDR   6MDR   12MDR   PLR   MLR   

 Mean   10.92   12.22   11.29   2.96   8.55   9.09   9.04   8.41   16.91   24.50   

 Median   12.00   10.63   10.20   3.24   8.52   9.33   9.63   8.28   16.82   24.54   

 Max   14.00   64.58   51.04   4.30   15.01   14.65   15.84   16.47   19.66   31.56   

 Min   6.00   0.77   0.89   1.40   3.49   4.13   3.50   3.53   14.58   17.17   

 SD   2.63   8.44   7.50   0.93   2.36   2.21   2.56   2.88   1.02   3.94   

 Skew   -0.60   2.51   2.31   -0.36   0.02   -0.09   -0.20   0.15   0.58   0.09   

 Kurt   2.18   13.65   10.79   1.81   3.27   2.81   2.43   2.13   3.63   2.27   

 J-Bera   12.87   837.72   495.83   11.73   0.46   0.41   2.92   5.15   10.59   3.39   

 Pvalue   0.0016   0.0000   0.0000   0.0028   0.7958   0.8142   0.2318   0.0760   0.0050   0.1840   

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 Sum   1582.75   1771.63   1636.52   428.90   1240.04   1317.39   1310.74   1219.25   2452.26   3552.63   

SSD   995.03   10264.86   8101.89   125.69   801.59   706.26   945.81   1190.77   150.62   2233.39   

 Obs   145.00   145.00   145.00   145.00   145.00   145.00   145.00   145.00   145.00   145.00   

Source: Author’s Compilation from Eviews  
Note: MPR represents Monetary Policy Rate, ITBC represents the Interbank Call Rate, OBBR 
represents the  
Open Buy-Back Rate, SDR represents the Savings Deposit Rate, 1MDR represents the One Month 
Deposit Rate,  
3MDR represents Three Months Deposit Rate, 6MDR represents Six Months Deposit Rate, 12MDR 
represents Twelve Months Deposit Rate, PLR represents Prime Lending Rate, while MLR represents 
Maximum Lending  Rate.  
Table 2 displayed the extent of correlation among the variables. While there are mild correlations 
between the policy rate, interbank rates (interbank and open buy back rates) and savings rate, there are 
weak positive correlations between the policy rate and one, three, six and twelve-month deposit rates. 
However, the maximum lending rate has a mildly strong positive correlation with the policy rate. Table 
3 confirmed that the policy rate and retail lending and deposit rates had a unit root, while the interbank 
call rate and open buy-back rate were stationary in their level form. 
Table 2: Correlation Matrix  
   ITBC  OBBR  SDR  1MDR  3MDR  6MDR  12MDR  PLR  MLR   
MPR  0.4321  0.5607  0.5095  0.0016  0.036  0.1559  0.1443 
 0.1684  0.7135   
Source: Author’s Compilation from Eviews, 2020  
Note: MPR represents Monetary Policy Rate, ITBC represents the Interbank Call Rate, OBBR 
represents the  
Open Buy-Back Rate, SDR represents the Savings Deposit Rate, 1MDR represents the One Month 
Deposit Rate,  
3MDR represents Three Months Deposit Rate, 6MDR represents Six Months Deposit Rate, 12MDR 
represents Twelve Months Deposit Rate, PLR represents Prime Lending Rate, while MLR represents 
Maximum Lending Rate. 
 
 
 
 
 
 
 
 
 
 
 

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Table 3: Unit Root Test  

Variable      

Augmented Dickey-Fuller   Phillip-Perron      

   
  Levels   Difference   Levels   Difference   Status   

MPR   Tstats   -0.7932   -11.4217   -1.0061   -11.5045   I(1)   

  Coeff   (0.8177)   (0.0000)***   (0.7502)   (0.0000)***     
ITBC   Tstats   -5.3064     -8.9017     I(0)   

  Coeff   (0.0000)***     (0.0000)***       
OBBR   Tstats   -3.5066     -7.2297     I(0)   

  Coeff   (0.0091)***     (0.0000)***       
SDR   Tstats   -1.1635   -14.0956   -1.1329   -13.9412   I(1)   

  Coeff   (0.6892)   (0.0000)***   (0.7018)   (0.0000)***     
1MDR   Tstats   -2.1948   -5.3466   -2.1339   -13.0838   I(1)   

  Coeff   (0.2092)   (0.0000)***   (0.2319)   (0.0000)***     
3MDR   Tstats   -1.8681   -7.0518   -2.1822   -12.486   I(1)   

  Coeff   (0.3466)   (0.0000)***   (0.2137)   (0.0000)***     
6MDR   Tstats   -2.0975   -11.772   -2.1968   -11.7704   I(1)   

  Coeff   (0.2461)   (0.0000)***   (0.2084)   (0.0000)***     
12MDR   Tstats   -2.2293   -15.9318   -2.7793   -15.9652   I(1)   

  Coeff   (0.1969)   (0.0000)***   (0.0638)*   (0.0000)***     
PLR   Tstats   -3.3835     -2.7922   -9.9880   I(1)   

  Coeff   (0.0132)**     (0.0619)*   (0.0000)***     
MLR   Tstats   -0.5625   -15.4055   -0.6058   -15.2306   I(1)   

   Coeff   (0.8740)   (0.0000)***   (0.8646)   (0.0000)***      

Source: Author’s Compilation from Eviews  
Note:  The ADF critical value with intercept are -3.48(1%), -2.88(5%) and -2.58(10%).  
  The Phillip-Perron critical value with intercept are-3.48(1%), -2.88(5%) and -
2.58(10%). ***, ** and * denote significance at 1%, 5% and 10% levels, respectively.  
4.1 Response from the Policy Rate to the Interbank Rate  
The first aspect of the analysis discusses the pass-through from the policy rate to the inter-bank market 
(the monetary approach). First, the bound test procedure was carried out to examine the extent of 
cointegration among the variables. The result from table 4 showed that cointegration exists among the 
variables, implying that there is a long-run relationship, and the interbank rates adjust to policy rate 
changes in the long run. 
 
 
 
 

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Table 4: Bound Test Result of Pass-Through from Policy Rate to Interbank Market  
  

   ITBC   OBBR   

F-Statistic   10.77   10.67   

Lower(1%)   6.84   6.84   

Upper(1%)   7.84   7.84   

Lower(5%)   4.94   4.94   

Upper(5%)   5.73   5.73   

Cointegration   Yes   Yes   

                                                      Source: Author’s Compilation from Eviews  
In the short run, Table 5 showed that the pass-through from the policy rate to the interbank market is 
incomplete, albeit to a higher degree at 0.88 for the interbank call rate and 0.71 for the open buy-back 
rate. Table 5 further suggests that the interbank call rate adjusts at 62% towards equilibrium in each 
month, while the open buy-back rate adjusts at 44% towards long-run equilibrium. An incomplete pass-
through implies that the interbank market responds less than proportionately to a change in the policy 
rate. This result is in line with the theoretical expectation which states that interest rate can have an 
incomplete pass through as a result of factors that cause interest rate stickiness such as the problem of 
asymmetric information, costs faced by banks (switching costs and adjustment costs), risk-sharing 
behavior and credit rationing. The result of an incomplete pass-through aligns with previous developing 
country studies (Fomum, 2011; Bangura, 2011; Lerskullawat, 2014; Mordi, Adebiyi, and Omotosho, 
2019) and previous developed country studies (Bredin, Fitzpatrick and Reilly, 2001; and De Bondt, 
2002, 2005).   
In the long run, however, the demand elasticity of the pass-through process exceeded one for both the 
interbank call rate (1.42) and the open buy-back rate (1.62). This implies that interest rate pass-through 
overshoots. The implication of this is that banks might have been engaged in raising their lending rates 
at the interbank market to counter the possibilities of a default in loan repayments between banks 
rather than reducing the supply of loans they create (De Bondt, 2005). The results of the asymmetric 
version of the error correction term (positive and negative error correction term) showed that banks 
fully adjust to equilibrium in line with monetary policy changes regardless of whether the policy rate is 
adjusted downward or upward. However, the null hypothesis that the positive and negative correction 
terms are equal is rejected, implying asymmetry between the positive and negative correction terms 
based on the Wald test for both the interbank call rate and open buy-back rate. Finally, the essence of 
the mean adjustment lag is to know the number of months required for a full adjustment process from 
the policy rate to the interbank rates (while the error correction term showed the correction speed in 
each month). Therefore, the computed mean adjustment lag for interbank call rate (0.12) and open buy-
back rate (0.29) showed that these interbank rates adjust to policy rate changes within a month, 
regardless of whether the policy rate is revised upwards or downwards.   
Table 5: Summary of Pass-Through from Policy Rate to Interbank Market  

 

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VAR      ITBC   OBBR   
SHORT-RUN   Coeff   0.8781   0.7101   
  Pvalue   (0.0032)***   (0.0024)***   
ECT   Coeff   -0.6203   -0.4375   
 Pvalue   (0.0000)***   (0.0000)***   
  
LONG-RUN   

Coeff   1.4155   1.6229   

  Pvalue   (0.0003)***   (0.0001)***   
ECT+   Coeff   1.0000   1.0000   
 Pvalue   (0.0000)***   (0.0000)***   
  
ECT  

Coeff   1.0000   1.0000   

  Pvalue   (0.0000)***   (0.0000)***   
MAL   Months   0.1965   0.6626   
MAL+   Months   0.1219   0.2899   
MAL  Months   0.1219   0.2899   
Wald   Pvalue   (0.0000)***   (0.0000)***   
Adj-R2      0.2289   0.4508   
SC    0.0931   0.332   
Het     

   
0.7947   0.5025   

Source: Author’s Compilation from Eviews  
***, ** and * denote significance at 1%, 5% and 10% levels, respectively.  
4.2 Response from the Interbank Rate to the Retail Lending and Deposit Rates   
4.2.1 Response from the Interbank Call Rate to the Retail Rates  
The second aspect of the analysis examines the pass-through from the interbank rates (interbank call 
rate and open buy-back rate) to the retail lending and deposit rate (cost of fund approach).   
The deposit rates are represented by the savings deposit rate, one month, three months, six months, 
and twelve months deposit rates, while the lending rates are represented by the prime lending rate and 
the maximum lending rate. The analyses in this section will further be divided into two separate 
analyses to reflect the response of the interbank call rate to the retail lending and deposit rates and the 
response of the open buy-back rate to the retail lending and deposit rates. The bound test result for 
Table 6 showed that only the one-month deposit rate had a long-run relationship with the interbank 
call rate (with an F-stats greater than the lower and upper bound at the 5% level), implying that the rest 
of the variables are short-run variables. 
 
Table 6: Bound Test Result of Pass-through from Interbank Call Rate to Retail Rate  

   SDR   1MDR   3MDR   6MDR   12MDR   PLR   MLR   

F-Statistic   1.91   7.6   3.28   3.99   4.97   5.08   4.54   

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Lower(1%)   6.84   6.84   6.84   6.84   6.84   6.84   6.84   

Upper(1%)   7.84   7.84   7.84   7.84   7.84   7.84   7.84   

Lower(5%)   4.94   4.94   4.94   4.94   4.94   4.94   4.94   

Upper(5%)   5.73   5.73   5.73   5.73   5.73   5.73   5.73   

Cointegration   No   Yes   No   No   Inconclusive   Inconclusive   No   

Source: Author’s Compilation from Eviews  
Table 7 summarizes the pass-through process from the interbank call rate to the retail lending and 
deposit rates. The results showed that in the short run, the savings deposit rate, twelve months deposit 
rate, and the prime lending rates are insignificant at a 5% level, while the one month (0.01), three 
months (0.01) and six months deposit rate (0.02) had an incomplete pass-through with a lower degree. 
The maximum lending rate (0.01) also had a lower and incomplete pass-through. These results were in 
line with the previous outcome, albeit to a considerably lower degree. Furthermore, the speed of 
adjustments of one-month (5%), three months (5%), six months (7%), twelve (11%) months deposit 
rate, and the prime lending rate (9%) was characteristically low in line with their short-run outcomes. 
That is the adjustment speed towards equilibrium is generally very slow for the series. In the long run, 
the one-month deposit rate also displayed an incomplete pass-through, also in line with the short-run 
outcomes. Furthermore, the positive and negative correction terms would only be computed for the 
one-month, three months, and six months deposit rates since they were the only results with significant 
short-run and error correction outcomes. This implies that the savings rate, twelve-month deposit 
rates, prime lending rate, and maximum lending rates have insignificant correction terms, and 
therefore, insignificant mean adjustment lags.  The positive correction terms for the one-month and 
three months deposit rates were insignificant, while the sixmonth deposit rate had a significant positive 
correction term. However, the three variables all had significant negative correction terms. Therefore, 
the positive mean adjustment lags for one-month and three-month deposit rates were also insignificant 
and irrelevant (notice that they were very high compared to the negative, which shows the results for 
the positive terms are spurious). Thus, the six months deposit rate fully adjusts to an upward interbank 
call rate change within a month, while the one- and three-month deposit rate fully adjust to a downward 
change in the interbank call rate within eight months; however, the six months deposit rate fully adjusts 
to a negative change in the interbank rate within a month. Finally, the Wald tests for the one-month, 
three months, and six months deposit rates support the presence of asymmetries among the positive 
and negative correction terms. The unresponsive nature of lending rates on the pass-through from the 
interbank call rate to the lending rate implies that the lending rate is sticky to changes in the interbank 
call rate. 
 
 
 
Table 7: Summary of Pass-Through from Interbank Call Rate to Retail Rate  

VAR     SDR  1MDR  3MDR  6MDR  12MDR  PLR  MLR  

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S-
RUN  

Coeff  0.0019  0.0138  0.0135  0.0205  0.0056  0.0029  0.0092  

  Pvalue  (0.41)  (0.05)**  (0.05)**  (0.02)**  (0.69)  (0.45)  (0.10)*  

ECT  Coeff  -0.0262  -0.0546  -0.0562  -0.0711  -0.1082  -0.0870  -0.0182  

  Pvalue  (0.20)  (0.02)**  (0.03)**  (0.02)**  (0.01)***  (0.01)***  (0.13)  

L-
RUN  

Coeff  0.1775  0.4957  0.2401  0.2885  0.3278  0.0338  1.1113  

  Pvalue  (0.24)  (0.06)*  (0.14)  (0.07)*  (0.06)*  (0.47)  (0.11)  

ECT+  Coeff  1.0000  0.0033  -0.0064  1.0000  1.0000  0.0044  0.0070  

  Pvalue  (0.00)***  (0.87)  (0.73)  (0.00)***  (0.00)***  (0.48)  (0.24)  

ECT-  Coeff  1.0000  0.1360  0.1222  1.0000  1.0000  0.0161  0.0112  

  Pvalue  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.08)*  (0.19)  

MAL  Months  38.15  18.10  17.55  13.78  9.19  11.39  54.44  

MAL+  Months  0.9981  298.85  154.14  0.98  0.99  226.61  141.54  

MAL-  Months  0.9981  8.07  8.07  0.98  0.99  61.93  88.46  

Wald   Pvalue  (0.00)***  (0.03)**  (0.00)***  (0.00)***  (0.00)***  (0.76)  (0.00)***  

Adj-
R2  

   0.9472  0.9273  0.9135  0.8837  0.7898  0.8632  0.9827  

SC    0.6926  0.8772  0.8369  0.6521  0.6889  0.3768  0.9387  

Het     0.8964  0.1519  0.2069  0.0825  0.0551  0.2845  0.162  

Source: Author’s Compilation from Eviews  
***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 
4.2.2 Response from the Open Buy-Back Rate to the Retail Rates 
The second aspect of this section measures the response from the open buy-back rate to the retail 
lending and deposit rates. The bound test result in Table 8 showed that there is no long run relationship 
among the series 
Table 8: Bound Test Result from Open Buy Back Rate to Retail Lending and Deposit Rate  

   SDR  1MDR  3MDR  6MDR  12MDR  PLR  MLR  

F-Statistic  1.4  4.08  2.9  3.67  3.85  4.37  1.87  

Lower(1%)  6.84  6.84  6.84  6.84  6.84  6.84  6.84  

Upper(1%)  7.84  7.84  7.84  7.84  7.84  7.84  7.84  

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Lower(5%)  4.94  4.94  4.94  4.94  4.94  4.94  4.94  

Upper(5%)  5.73  5.73  5.73  5.73  5.73  5.73  5.73  

Cointegration  No  No  No  No  No  No  No  

Source: Author’s Compilation from Eviews  
In the short run, the one-month and six months deposit rates were significant, while the maximum lending rate 
was the only lending rate found to be significant. The pass-through for the one month (0.01), six months (0.02), 
and maximum lending rates (0.01) were also found to be incomplete and very low, in line with the results from 
the pass-through from the interbank call rate to the retail rates. The adjustment speed for the onemonth (5%), 
three months (5%), six months (7%), and twelve months (10%) deposit rates and the prime lending rate (9%) 
were also found to be characteristically low in line with the interbank call rate outcomes. Since the onemonth 
and six months deposit rates had significant short-run and error correction outcomes, this study computed their 
positive and negative correction terms and their mean adjustment lags.   
The positive and negative correction terms show that the one-month and six months deposit rates fully adjust to 
a change in the open buy-back rate either upward or downward. Their mean adjustment lags further suggest that 
they adjust within a month to the upward or downward movements in the open buy-back rate. Finally, the Wald 
test shows that there are asymmetries in the way the positive and negative correction terms respond to changes 
in the open buy-back rate.   
The unresponsive nature of lending rates on the pass-through process from the open buy-back rate to the lending 
rate implies that the lending rate is sticky to changes in the interbank rate. These outcomes corroborate the 
previous outcomes on interest rate pass-through from the interbank call rate to the retail lending and deposit 
rates. 
Table 9: Summary of Pass-Through from Open Buy-Back Rate to Retail Rate  
  

 
S-RUN  Coeff  0.0035  0.0135  0.0107  0.0185  0.0177  -0.0051  0.0137  

  Pvalue  (0.16)  (0.09)*  (0.17)  (0.06)*  (0.24)  (0.32)  (0.04)**  

ECT  Coeff  -0.0253  -0.0496  -0.0536  -0.0677  -0.0965  -0.0893  0.0173  

  Pvalue  (0.21)  (0.05)**  (0.04)**  (0.02)**  (0.02)**  (0.01)***  (0.17)  

L-RUN  Coeff  0.1394  0.2712  0.1987  0.2737  0.1836  0.0391  0.7946  

  Pvalue  (0.28)  (0.21)  (0.26)  (0.12)  (0.27)  (0.49)  (0.14)  

ECT+  Coeff  0.0387  1.0000  -0.052  1.0000  1.0000  -0.0076  0.001  

  Pvalue  (0.12)  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.48)  (0.89)  

ECT-  Coeff  0.0456  1.0000  0.0045  1.0000  1.0000  -0.0131  0.0148  

  Pvalue  (0.14)  (0.00)***  (0.75)  (0.00)***  (0.00)***  (0.11)  (0.11)  

MAL  Months  39.39  19.89  18.46  14.5  10.18  11.14  57.01  
MAL+  Months  25.75  0.9865  19.025  0.9815  0.9823  130.91  986.3  
MAL-  Months  21.85  0.9865  219.84  0.9815  0.9823  75.95  66.64  

Wald   Pvalue  

 

VAR       SDR   MDR 1   MDR 3   MDR 6   MDR 12   PLR   MLR   

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Adj-R2    
 0.9471 
SC  0.6236  0.2113  0.5231  0.7944  0.7808  0.3942  0.5645  
  
Het     0.5399  0.1352  0.1014  0.1089  0.089  0.0803  0.0057  

 
Source: Author’s Compilation from Eviews  
***, ** and * denote significance at 1%, 5% and 10% levels, respectively.  
4.3 Response from the Policy Rate to the Retail Lending and Deposit Rates   
The final aspect of these analyses examines the pass-through from the policy rate to the retail lending 
and deposit rates. First, the bound test results in Table 10 showed that there was no long-run 
relationship among the observed variables.   
Table 10: Bound Test Result from Policy Rate to Retail Lending and Deposit Rate  

 
   SDR   1MDR   3MDR   6MDR   12MDR   PLR   MLR   

F-Statistic   4.28   4.01   3.44   2.85   4.31   3.94   3.01   

Lower(1%)   6.84   6.84   6.84   6.84   6.84   6.84   6.84   

Upper(1%)   7.84   7.84   7.84   7.84   7.84   7.84   7.84   

Lower(5%)   4.94   4.94   4.94   4.94   4.94   4.94   4.94   

Upper(5%)   5.73   5.73   5.73   5.73   5.73   5.73   5.73   

Cointegration   No   No   No   No   No   No   No   

Source: Author’s Compilation from Eviews   
The short-run results show that the pass-through from the policy rate to the retail lending and deposit 
rates is incomplete and characterized by a lower degree of pass-through from the policy rate to the retail 
rates. This outcome of an incomplete pass-through corroborates the outcome generated from the pass-
through from the policy rate to the interbank rate, albeit to a lower degree this time around. The error 
correction terms also suggest that the savings, one month, three months, and six months deposit rates 
adjust at a slow speed of 5%, while the twelve months deposit rate and the prime lending rate adjust at 
a slow speed of 9%. However, the maximum lending rate adjusts at a slow speed of 3%. The positive 
and negative corrections terms of one month, three months, and six months deposit rates suggest that 
these rates adjust completely to a change in the policy rate either upwards or downwards, while the six 
months and twelve months deposit rates adjust strongly to a change in the policy rate either upwards 
or downwards. However, the lending rates (prime and maximum lending rates) adjust slowly to an 
upward or downward change in the policy rate.    
Furthermore, the mean adjustment lags suggest that the five (5) deposit rates will fully adjust to an 
upward or downward policy rate change within a month, while it will take around three months for the 
maximum lending rate to fully adjust to an upward change in the policy rate and it will take around 10 
months for the maximum lending rate to fully respond to a downward change in the policy rate. This 
result is also similar to the outcomes of the prime lending rate even though it had an insignificant short-
run result, and its negative mean adjustment lag is around eight months. Finally, the Wald test suggests 

(0.18)   (0.00)***   (0.00)***   (0.00)***   (0.00)***   (0.01)**   (0.00)***   

  0.9206   0.9122   0.8821   0.7847   0.8645   0.9823   

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that there are asymmetries in the way the positive and negative correction terms respond to changes in 
the policy rate, except for the twelve months deposit rate, which suggests it takes around ten months 
for a change in the policy rate to fully reflect on the twelve months deposit rate. These outcomes imply 
that the deposit rates adjust faster to an upward or downward change in the policy rate compared to 
the lending rates.  
 
Table 11: Summary of Pass-Through from Policy Rate to Retail Rate  
  

 
S-RUN  Coeff  0.0229  0.0409  0.0381  0.3586  0.0792  0.0043  0.0546  

  Pvalue  (0.00)***  (0.08)*  (0.08)*  (0.03)**  (0.07)*  (0.73)  (0.02)**  

ECT  Coeff  -0.0483  -0.0478  -0.0518  -0.0504  -0.095  -0.0856  -0.0321  

  Pvalue  (0.03)**  (0.05)**  (0.04)**  (0.09)*  (0.02)**  (0.01)***  (0.05)**  

L-RUN  Coeff  0.4749  0.8552  0.7357  1.0624  0.8337  0.0501  1.6984  

  Pvalue  (0.02)**  (0.22)  (0.21)  (0.18)  (0.13)  (0.74)  (0.01)***  

ECT+  Coeff  0.861  1.0000  1.0000  1.0000  0.9133  0.3267  0.289  

  Pvalue  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.00)***  

ECT-  Coeff  0.6128  1.0000  1.0000  1.0000  0.9415  0.1262  0.0969  

  Pvalue  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.00)***  (0.04)**  (0.08)*  

MAL  Months  20.23  20.06  18.57  12.73  9.69  11.63  29.45  
MAL+  Months  1.13  0.96  0.96  0.64  1.01  3.05  3.27  

MAL-  Months  1.59  0.96  0.96  0.64  0.98  7.89  9.76  
Wald   Pvalue  (0.05)** (0.56)  (0.02)**  (0.02)**  

 
Adj-R2    0.9207 0.7878  0.8627  0.9824  
SC  0.5134  0.4106  0.8216  0.8928  0.7429  0.3137  0.5337  
  
Het     0.6166  0.1147  0.0858  0.0002  0.0514  0.051  0.0003  

 
Source: Author’s Compilation from Eviews  
***, ** and * denote significance at 1%, 5% and 10% levels, respectively.   
5. Conclusion and Policy Recommendations   
This paper examines interest rate pass-through in Nigeria, with a focus on the pass-through process 
from the policy rate to the money market and retail rates and from the money market rates to the retail 
rates. The results show that there were an incomplete short-run pass-through albeit at a higher degree 
from the policy rate to the interbank rate, while in the long run, the pass-through process overshoots. 
However, this pass-through was found to be very low from the policy rate to the retail rates and from 

VAR       SDR   MDR 1   MDR 3   MDR 6   MDR 12   PLR   MLR   

(0.01)***   (0.00)***   

0.9129   0.8853   

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the money market rates to the retail rates. The mean adjustment lags were very low, suggesting that it 
takes a quicker period (in terms of months) for changes in the policy rate to fully reflect in the interbank 
and retail rates. Finally, compared to the lending rates, the deposit rates were found to respond more 
significantly, albeit slowly to changes in the policy rate and money market rates, also suggesting that 
the lending rates are stickier to monetary policy changes.   
From these outcomes, it can be argued that the introduction of the policy rate improved the interbank 
market tremendously and the policy reforms were significantly targeted at reducing distortions within 
the interbank market. In essence, we recommend that the monetary authorities critically appraise the 
size of interest rate pass-through to the retail and money market rates in light of the heterogeneous 
response from the policy rate to the retail and money market rates and the adjustment process toward 
their long-run equilibrium. Also, the weak pass-through between the money market and the retail 
lending and deposit rates suggests that other supplementary measures are necessary to remove the 
distortions in the retail lending and deposit rates to ensure that the retail rates fully adjust in line with 
the policy rate change and other money market rate changes.  
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