Nigerian banks quick to raise lending rate but slow to reduce it – IMF

The International Monetary Fund has stated that Nigerian banks raise lending rates quickly when monetary policy is tightened but are far slower to cut borrowing costs or boost returns for savers.

At its most recent monetary policy committee meeting, the Central Bank of Nigeria kept the monetary policy rate, which serves as the benchmark for interest rates across the country, at 26.5 percent. The committee also left the cash reserve ratio for deposit money banks at 45 percent, for merchant banks at 16 percent, and for non-TSA public sector deposits at 75 percent.

In its June 2026 country report titled “Nigeria: Selected Issues,” the IMF said monetary policy transmission has improved since Nigeria unified its foreign exchange market in June 2023, though significant distortions remain within the banking system. “Interest rate transmission displays a clear ‘rockets-and-feathers’ pattern, with borrowing rates adjusting upward rapidly during tightening cycles but declining only gradually when policy is eased,” the IMF said.

“When the CBN tightens, wholesale and lending rates respond strongly and more than proportionally: a 100 basis-point MPR hike raises T-bill and lending rates by roughly 175–180 basis points on impact, whereas a comparable cut lowers them by only about 25–30 basis points.

“This asymmetry – statistically significant implies that banks transmit tightening rapidly and even amplify it but adjust much more slowly during easing cycles. By contrast, while the interbank rate responds symmetrically (around 0.6 in both directions) and deposit rates show little response either way (around 0.12), both are not significant.”

According to the Washington-based institution, savings deposit rates have largely remained stuck between 3 percent and 7 percent even after the MPR was raised to 26.75 percent in 2024. The report attributed this trend to limited competition for deposits and the presence of what it called “captive depositors” with few other investment options.

The IMF also said Nigeria’s shift to a market-driven exchange rate regime has fundamentally changed how inflation works in the country. According to the report, the June 2023 unification of the various FX windows ended a system where the official exchange rate served more as a policy tool than a true market signal. The lender said exchange rate movements now play a more direct role in pushing up consumer prices.

The financial institution added that global oil price shocks continue to fuel domestic inflation despite their positive effect on export earnings and foreign exchange inflows.

“Global oil supply disruption shocks lead to a naira appreciation driven by higher export revenues, but inflation nonetheless increases, reflecting the dominant impact of associated higher cost-push pressures,” the report said. The IMF explained that higher crude prices raise transportation and logistics costs, which are then passed on to consumers through more expensive food and other goods.

The report also warned against monetising fiscal deficits through the CBN’s ways and means facility, saying such financing arrangements add to inflationary pressures. According to the fund, fiscal shocks financed through central bank lending can trigger currency depreciation and increase money supply growth, leading to a front-loaded rise in consumer prices.

The IMF further urged the CBN to review its cash reserve ratio framework to improve the effectiveness of monetary policy transmission. “The very high cash reserve ratio (CRR), currently at 45 percent, should also be streamlined to support this process,” the report said.

The lender said lower inflation, improved macroeconomic stability, and stronger confidence in the naira would create room for a gradual reduction in reserve requirements over time. The recommendation comes as the CBN targets single-digit inflation.