Nigerian banks increase lending rates much faster when the Central Bank of Nigeria (CBN) tightens monetary policy than they reduce them when policy is eased, according to the International Monetary Fund (IMF).

The finding was contained in the IMF’s June 2026 country report, Nigeria: Selected Issues, which described interest rate transmission in Nigeria as following a “rockets-and-feathers” pattern, where borrowing costs rise rapidly during monetary tightening cycles but decline only gradually during periods of easing.

According to the Fund, recent reforms, including the unification of Nigeria’s foreign exchange market, have improved the transmission of monetary policy to market rates. However, it noted that the process remains incomplete and called for further reforms to the CBN’s operational framework and liquidity management system.

The IMF said monetary policy tightening by the CBN has a disproportionately large impact on wholesale and lending rates.

According to the report, a 100-basis-point increase in the Monetary Policy Rate (MPR) leads to an immediate increase of about 175 to 180 basis points in Treasury bill and lending rates. By contrast, a similar reduction in the policy rate results in borrowing costs declining by only 25 to 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,” the IMF said.

The report found that while the interbank rate responds relatively evenly to both tightening and easing cycles, deposit rates show little reaction in either direction.

According to the IMF, this suggests that monetary policy transmission in Nigeria operates more through changes in lending and wholesale rates than through deposit rates, limiting the speed at which lower policy rates translate into cheaper borrowing costs for households and businesses.

The Fund also observed that the pass-through of policy decisions to market rates has improved since the unification of Nigeria’s foreign exchange market but remains only partial.

The IMF argued that strengthening the CBN’s operational framework would improve the effectiveness of monetary policy by ensuring that the MPR better anchors the interbank market and influences other key interest rates across the economy.

According to the report, aligning liquidity management operations with the central bank’s policy stance would reinforce the transmission mechanism.

The Fund also identified Nigeria’s relatively high Cash Reserve Ratio (CRR), currently set at 45 per cent for deposit money banks, as an area requiring reform.

It noted that as inflation moderates over the medium term, the nominal policy rate should decline, reducing the cost of liquidity management and creating room for a gradual reduction in reserve requirements.

The IMF further argued that lower and more stable inflation would strengthen confidence in the naira, reduce dollarisation pressures and increase demand for local currency in both circulation and bank deposits.

Higher demand for the naira, it said, would help reduce structural excess liquidity in the financial system and support a gradual easing of the CRR over time.

The IMF’s assessment comes shortly after the CBN’s latest Monetary Policy Committee (MPC) meeting, where policymakers opted to maintain a tight monetary stance in a bid to consolidate gains against inflation and stabilise the economy.

At the meeting, the MPC retained the Monetary Policy Rate at 26.5 per cent, while keeping the Cash Reserve Ratio at 45 per cent for deposit money banks, 16 per cent for merchant banks and 75 per cent for non-TSA public sector deposits.

The IMF’s findings suggest that even if the CBN begins lowering interest rates in the future, businesses and consumers may not experience an immediate reduction in borrowing costs because commercial banks tend to pass on rate increases much faster than rate cuts.

The report comes amid broad support from economic experts, financial analysts and small business operators for the CBN’s decision to maintain the benchmark interest rate at 26.5 per cent.

Earlier, the IMF said Nigeria’s economic reforms over the past three years have strengthened macroeconomic stability and improved resilience, although it warned that poverty and food insecurity remain severe across the country. (Arise News)

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