Citation:

Abdul Drisu, Miftahu Idris. "Optimal Interest Rate Threshold and Economic Growth in Nigeria: Threshold Regression Evidence and Policy Implications for Monetary Policy" International Research Journal of Economics and Management Studies, Vol. 5, No. 8, pp. 146-158, 2026. Crossref. https://doi.org/10.56472/25835238/IRJEMS-V5I8P115

Abstract:

Interest rates play a pivotal role in monetary policy transmission, influencing investment decisions, credit allocation, and overall economic performance. In Nigeria, persistently high lending rates in recent years have raised concerns about their potential to stifle private sector investment and economic growth. This study examines the existence of an optimal lending interest rate threshold consistent with economic growth in Nigeria over the period 2000Q1–2023Q4. Using quarterly time series data and the Threshold Regression model (Bai-Perron approach), the analysis identifies a statistically significant structural threshold at 26.69%. Below this threshold, the lending interest rate exerts a positive and statistically significant effect on real GDP growth (coefficient = 0.063, p < 0.05). However, once the lending rate exceeds 26.69%, the effect turns strongly negative and statistically significant (coefficient = −0.238 in the intermediate regime and −6.91 beyond 29.95%, both p < 0.05). The evidence validates a non-linear relationship between rates and growth. Results hold after controlling for inflation, nominal exchange rate volatility and credit to the private sector, as well as diagnostic tests. The result shows that lending rates above a certain threshold are harmful to growth. It advises that the Central Bank of Nigeria's Monetary Policy Committee (MPC) must anchor the Monetary Policy Rate (MPR) suitably to steer lending rates at or below 26.69%, its optimal rate, in order to push credit expansion and sustainable growth of the economy.

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Keywords:

Optimal Interest Rate Threshold, Economic Growth, Threshold Regression, Monetary Policy, Lending Rate, Nigeria.