An entrenched imbalance in the banking industry is weakening the transmission of monetary policy, as lenders rapidly increase borrowing costs during tightening cycles but move far more slowly when conditions favour lower interest rates.
This assessment emerged from the International Monetary Fund’s (IMF) latest country report on Nigeria, which found that commercial banks react swiftly and disproportionately to interest rate increases by the Central Bank of Nigeria (CBN), but are slower in passing the benefits of lower rates to businesses and households.
In its June 2026 report titled Nigeria: Selected Issues, the Washington-based lender described Nigeria’s interest-rate transmission mechanism as exhibiting a “rockets-and-feathers” pattern, a phenomenon in which lending rates rise like rockets during policy tightening cycles but drift downward like feathers when monetary conditions ease.
The report indicates that while the CBN’s aggressive tightening campaign has succeeded in pushing borrowing costs higher across the economy, future rate cuts may not translate into immediate relief for consumers, manufacturers, small businesses, and investors.
According to the IMF, a 100-basis-point increase in the Monetary Policy Rate (MPR) triggers an almost immediate rise of between 175 and 180 basis points in Treasury bill yields and commercial lending rates.
However, when the central bank cuts rates by the same margin, lending rates decline by only 25 to 30 basis points.
“This asymmetry is statistically significant and implies that banks transmit tightening rapidly and even amplify it, but adjust much more slowly during easing cycles,” the IMF noted.
The finding raises fresh questions about the efficiency of Nigeria’s monetary transmission system and whether changes in policy rates are reaching the broader economy as intended.
The issue has become increasingly relevant following the CBN’s decision to maintain a restrictive monetary stance in its latest Monetary Policy Committee meeting.
The committee retained the benchmark Monetary Policy Rate at 26.5 percent while leaving the Cash Reserve Ratio at 45 percent for deposit money banks, 16 percent for merchant banks, and 75 percent for non-Treasury Single Account public-sector deposits.
Although inflationary pressures have shown signs of moderation, policymakers have remained cautious about loosening monetary conditions too quickly.
For businesses already struggling with high borrowing costs, however, the IMF’s findings suggest that any future policy easing may not immediately reduce financing costs.
The report also highlights another imbalance within Nigeria’s financial system: the limited responsiveness of deposit rates.
While banks rapidly adjust lending rates upward following policy tightening, savings rates have remained largely stagnant despite one of the most aggressive interest-rate cycles in Nigeria’s history.
According to the IMF, savings deposit rates have generally remained within the three to seven percent range even after the CBN raised the MPR to as high as 26.75 percent in 2024.
The Fund attributed this to limited competition among banks for retail deposits and the existence of what it described as “captive depositors” who have relatively few alternative investment opportunities.
As a result, while borrowers face sharply rising financing costs, savers receive only marginally improved returns on their deposits.
This imbalance effectively widens banks’ interest margins, allowing lenders to benefit from higher lending rates without proportionately increasing the cost of attracting deposits.
Financial analysts say the development reflects deeper structural characteristics of Nigeria’s banking sector, where market concentration, liquidity conditions, and regulatory requirements shape the transmission of monetary policy.
The IMF nevertheless acknowledged that significant progress has been made since the June 2023 unification of Nigeria’s foreign exchange market.
According to the report, the transition from a managed multi-window exchange-rate regime to a more market-determined system has strengthened the relationship between monetary policy and market interest rates.
Prior to the reforms, the official exchange rate often functioned as a policy instrument rather than a genuine market signal, weakening the effectiveness of monetary interventions.
The IMF said exchange-rate unification has improved policy transmission by allowing interest-rate decisions to influence broader financial conditions more effectively.
However, it warned that the process remains incomplete and that distortions within the banking system continue to weaken the full impact of monetary policy decisions.
The report urged the CBN to further strengthen its operational framework, arguing that a more effective transmission mechanism would allow the benchmark policy rate to better influence interbank markets, lending rates, and financial conditions across the economy.
The IMF also identified Nigeria’s exceptionally high Cash Reserve Ratio as an area requiring reform.
At 45 percent, Nigeria’s CRR remains among the highest in the world, effectively requiring banks to hold almost half of their deposits with the central bank.
While the policy has been used as a liquidity management tool to combat inflation and stabilise the financial system, critics argue that it reduces the volume of funds available for lending and increases the cost of credit.
The Fund said that as inflation moderates and macroeconomic conditions improve, there should be room for a gradual reduction in reserve requirements.
“The very high cash reserve ratio should be streamlined to support the transmission process,” the IMF stated.
According to the institution, lower inflation and stronger confidence in the naira would reduce the need for aggressive liquidity sterilisation, allowing policymakers to ease reserve requirements over time.
Such a move could help expand credit availability while lowering liquidity management costs within the banking system.
Beyond banking-sector dynamics, the IMF also highlighted the evolving relationship between exchange-rate movements and inflation following Nigeria’s foreign exchange reforms.
The Fund noted that exchange-rate fluctuations now play a more direct role in shaping domestic price levels than they did under the previous exchange-rate regime.
As a result, inflation has become more sensitive to both external shocks and domestic policy decisions.
Particularly notable is the IMF’s assessment of global oil-price movements.
While higher crude oil prices traditionally benefit Nigeria through increased export earnings and stronger foreign exchange inflows, the report argues that the inflationary effects of rising oil prices often outweigh these gains in the short term.
According to the IMF, global oil supply disruptions can lead to naira appreciation through higher export revenues while simultaneously increasing inflation because of higher transportation, logistics, and production costs.
The resulting cost-push pressures are passed through the economy, raising food prices and the cost of goods and services.
The Fund also renewed its warning against excessive reliance on central bank financing of government deficits through the Ways and Means facility.
According to the report, monetisation of fiscal deficits contributes to inflationary pressures by expanding money supply and weakening currency stability.
Fiscal shocks financed through central bank lending can trigger exchange-rate depreciation, accelerate inflation, and undermine the effectiveness of monetary policy, the IMF warned.
