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

The International Monetary Fund (IMF) says Nigerian banks raise lending rates rapidly when monetary policy is tightened but are slower to reduce borrowing costs or increase returns to savers.

At its last monetary policy committee (MPC) meeting, the Central Bank of Nigeria (CBN) retained the monetary policy rate (MPR), which benchmarks interest rates in the country, at 26.5 percent.

The committee further retained the cash reserve ratio (CRR) for deposit money banks at 45 percent, merchant banks at 16 percent, and non-TSA public sector deposits at 75 percent.

In its June 2026 country report titled ‘Nigeria: Selected Issues,’ the IMF said the transmission of monetary policy has improved since the unification of Nigeria’s foreign exchange (FX) market in June 2023, although 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,” 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 within the 3 percent to 7 percent range even after the monetary policy rate (MPR) was raised to 26.75 percent in 2024.

The report attributed the trend to limited competition for deposits and the presence of what it described as “captive depositors” with few alternative investment options.

The IMF also said Nigeria’s transition to a market-determined exchange rate regime has fundamentally changed the country’s inflation dynamics.

According to the report, the June 2023 unification of the FX windows ended a system in which the official exchange rate functioned largely as a policy tool rather than a market signal.

The lender said exchange rate movements now play a more direct role in driving consumer prices.

The financial institution added that global oil price shocks continue to fuel domestic inflation despite their positive impact 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 said higher crude oil prices raise transportation and logistics costs, which are passed on to consumers through higher food and commodity prices.

The report also warned against the monetisation of fiscal deficits through the CBN’s ways and means facility, saying such financing arrangements contribute 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 (CRR) 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.