THE NEXUS BETWEEN MONETARY POLICY RATE (MPR) AND BONDPRICES AND YIELDS IN NIGERIA

Abstract

Monetary policy remains a cornerstone of macroeconomic stability in emerging economies. Its transmission to bond markets is often hindered by structural inefficiencies. This study investigated the impact of Nigeria’s Monetary Policy Rate (MPR) on bond yields and prices from 2015 to 2024. The study integrated the Expectations Theory of the Term Structure of Interest Rates with empirical analysis. Using monthly data and robust
econometric techniques (OLS and VECM). The results confirm that a statistically significant positive relationship exist between MPR and bond yields and an inverse relationship with bond prices. Critically, inflation and exchange rate volatility emerge as potent mediators, amplifying MPR’s effects while exposing market asymmetries yields adjust 40% faster than prices to policy shocks. The findings reveal persistent frictions in
Nigeria’s bond market, where fiscal dominance, currency instability, and shallow liquidity dilute monetary signals. The study recommends institutionalizing forward guidance, implementing targeted measures to curb inflation. Also, introducing sovereign inflation indexed bonds to protect investors from purchasing power erosion, and establishing a
monetary-fiscal council to align debt issuance calendars with MPR cycles.
Keywords: Bond Prices, Bond Yields, Exchange Rate, Inflation, Monetary Policy Rate.