Headline: Interbank Rate Hits Five-Year High as CBN Tightens Liquidity to Combat Inflation
In January 2025, Nigeria’s interbank lending rate surged to 28.58 percent, marking a five-year high as the Central Bank of Nigeria (CBN) continued its aggressive monetary tightening. The interbank rate, the interest at which banks lend to each other overnight, is a key indicator of liquidity conditions. The sharp rise in rates signals tighter cash availability, which in turn increases borrowing costs for businesses and consumers, contributing to higher inflation.
The spike in the interbank rate follows a broader shift in the CBN’s monetary policy. After maintaining an expansionary stance in 2020, the CBN raised the benchmark Monetary Policy Rate (MPR) to 27.50 percent in 2025 from 11.50 percent in 2021, seeking to curb inflation. These actions have caused borrowing costs to rise significantly, with prime lending rates exceeding 30 percent, impacting businesses’ access to affordable credit and increasing financial strain.
The CBN’s tightened policy has resulted in liquidity shortages, which have further driven up short-term borrowing costs. The central bank’s ramped-up Open Market Operations (OMO), designed to absorb excess liquidity, played a key role in this. In 2024, the CBN sold N11.8 trillion in securities, marking a staggering 1,773.7 percent increase from the previous year, to reduce money supply and make borrowing more expensive. Despite a slight dip in inflation, the liquidity squeeze continues to pressure the banking sector and economy.
As of March 2025, short-term borrowing rates reached even higher levels, with the overnight lending rate at 32.83 percent, signaling ongoing liquidity constraints. While the CBN’s policies have somewhat curbed inflation, the high borrowing costs are expected to persist, impacting businesses, particularly SMEs, and potentially dampening economic growth. Higher costs of credit could lead to reduced investments, consumption, and increased inflationary pressures. The CBN’s focus on stabilizing the economy suggests that these conditions will likely continue in the near term.
Source: Business day