IMF faults Nigerian banks for slow response to interest rate cuts

THE International Monetary Fund (IMF) has said Nigerian banks are quick to raise lending rates when the Central Bank of Nigeria (CBN) tightens monetary policy, but slow to reduce borrowing costs when rates are eased.

In its June 2026 country report entitled ‘Nigeria: Selected Issues,’ the Washington-based institution said the country’s monetary policy transmission mechanism has strengthened since the unification of the foreign exchange (FX) market in June 2023, although distortions within the banking system still persist.

The IMF’s comments come after the CBN retained the monetary policy rate (MPR) at 26.5 percent during its latest Monetary Policy Committee (MPC) meeting.

The apex bank also maintained 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.

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According to the IMF, interest rate transmission in Nigeria follows what economists describe as a ‘rockets-and-feathers’ pattern, where banks rapidly increase lending rates during tightening cycles but are reluctant to reduce them when policy conditions soften.

The report stated that a 100 basis-point increase in the MPR typically pushes treasury bill and lending rates up by about 175 to 180 basis points almost immediately. However, a similar rate cut results in only a 25 to 30 basis-point decline in borrowing costs.

“This asymmetry — statistically significant — implies that banks transmit tightening rapidly and even amplify it but adjust much more slowly during easing cycles,” the IMF said.

The institution noted that interbank rates respond more evenly to both tightening and easing, while deposit rates remain largely unresponsive in either direction.

According to the report, savings deposit rates have stayed within the 3 percent to 7 percent range despite the sharp rise in benchmark interest rates, including the increase of the MPR to 26.75 percent in 2024.

The IMF attributed the weak response in deposit rates to limited competition among banks for customer deposits and the existence of what it described as ‘captive depositors’ with limited investment alternatives.

The lender also said Nigeria’s transition to a market-determined exchange rate regime has significantly altered the country’s inflation dynamics.

It noted that the June 2023 unification of the FX windows ended a framework where the official exchange rate was used largely as a policy instrument rather than reflecting market realities.

As a result, exchange rate movements now play a more direct role in influencing consumer prices across the economy.

The IMF further warned that global oil price shocks continue to worsen domestic inflation despite boosting export earnings and FX inflows.

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According to the report, oil supply disruptions may strengthen the naira through higher export revenues, but inflation still rises because of higher transportation, logistics and production costs passed on to consumers.

The report also cautioned against financing fiscal deficits through the CBN’s ways and means facility, saying such practices could increase money supply, weaken the naira and intensify inflationary pressures.

In addition, the IMF said Nigeria’s current cash reserve ratio of 45 percent remains excessively high and should eventually be streamlined as macroeconomic conditions improve.

The institution said declining inflation, stronger confidence in the naira and improved macroeconomic stability would create room for a gradual reduction in reserve requirements over time.

The recommendation comes as the CBN continues efforts to drive inflation down to single-digit levels.