This study investigates interest rate policy and market capitalization in Nigeria. Data on time-series were obtained from the Central Bank of Nigeria Statistical Bulletin. The dependent variable (MCR) and the independent variables are also defined: the prime lending rate, savings rate, money market rates and monetary policy rate. Methods: Market capitalization and interest rate policy were estimated using descriptive statistics and multiple regression models. The analytical models include Ordinary Least Squares (OLS), Augmented Dickey-Fuller (ADF) test and Autoregressive Distributed Lag (ARDL). The estimated model showed that the variation of market capitalization ratio (MCR) was 99.8% jointly explained with independent variables included in the model. Monetary policy rate and prime lending rate did not have statistically significant positive but negative effect on the development financial sector measured by market capitalization. The finding of the study also established that interest rate policy is a significant factor affecting variation of stock market capitalisation in Nigeria. It suggested that monetary authorities should continue to promote lending at moderate rates which support borrowing for productive investment while avoiding excessive crowding out of low-risk borrowers. Additionally, the Central Bank of Nigeria must adjust interest rates in more gradual and nuanced ways so as not to stifle private-sector access to finance.

Keywords: Interest Rate Policy, Monetary Policy Rate, Prime Lending Rate, Savings Rate, Stock Market Capitalization.