IMF Flags Lending Rate Imbalance as Nigerian Banks React Faster to Rate Hikes Than Cuts
The International Monetary Fund (IMF) has raised concerns over the way Nigerian banks respond to changes in monetary policy, noting that financial institutions are quick to increase lending rates when interest rates rise but much slower to reduce borrowing costs when policy rates are lowered. The observation was contained in the IMF’s June 2026 report titled Nigeria: Selected Issues, which examined the effectiveness of the country’s monetary policy framework and its impact on the economy.
According to the report, Nigeria’s monetary policy transmission mechanism has improved since the unification of the foreign exchange market in June 2023. However, the IMF said distortions remain within the banking sector. The Fund highlighted a “rockets-and-feathers” pattern in interest rate adjustments, explaining that banks rapidly pass on higher costs to borrowers during tightening cycles while delaying rate reductions when monetary conditions ease. It noted that a 100-basis-point increase in the Monetary Policy Rate (MPR) typically pushes treasury bill and lending rates up by about 175 to 180 basis points, while a similar reduction in the MPR lowers rates by only 25 to 30 basis points.
The IMF further revealed that Nigerian savers have seen little benefit from the Central Bank of Nigeria’s aggressive rate hikes in recent years. Despite the MPR reaching 26.75 percent in 2024 and currently standing at 26.5 percent, savings deposit rates have remained largely between 3 percent and 7 percent. The institution attributed this trend to weak competition among banks for deposits and the existence of what it described as “captive depositors” who have limited alternative investment opportunities.
Beyond the banking sector, the IMF said Nigeria’s transition to a market-driven exchange rate regime has significantly altered the country’s inflation dynamics. The report noted that the unification of foreign exchange windows in 2023 ended a system where the official exchange rate was largely controlled by policy decisions rather than market forces. As a result, exchange rate movements now have a stronger and more direct influence on consumer prices. The Fund also warned that global oil price shocks continue to fuel inflation, as rising crude prices increase transportation, logistics, and production costs that are eventually passed on to consumers.
The IMF also cautioned against financing fiscal deficits through the Central Bank’s Ways and Means facility, arguing that such practices could worsen inflationary pressures by increasing money supply and weakening the naira. In addition, the lender called for a review of Nigeria’s cash reserve ratio framework, currently set at 45 percent for deposit money banks, describing it as excessively high. According to the report, lower inflation, stronger confidence in the naira, and improved macroeconomic stability could eventually create room for a gradual reduction in reserve requirements and enhance the effectiveness of monetary policy transmission across the economy.
source: The cable