The Central Bank of Nigeria (CBN) has raised the Standing Deposit Facility (SDF) rates as part of its continuous attempts to control liquidity in the financial sector.
Significant changes to interest rate policy were approved at the 296th Monetary Policy Committee (MPC) meeting, and a circular outlining this decision was issued on August 26, 2024.
The CBN adjusted the Monetary Policy Rate (MPR) Asymmetric Corridor from +100/-300 basis points (bps) to +500/-100 bps. With this big change, the central bank hopes to deter banks from hoarding surplus liquidity and encourage more lending.
The Standing Lending Facility (SLF) rate, which banks use to borrow short-term funds from the CBN, has been raised to 31.75%.
The SDF rate, applicable to deposits made by banks at the CBN, has been increased to 25.75%. The circular also specifies that:
Commercial and Merchant Banks will receive 25.75% on deposits up to ₦3.00 billion, while deposits exceeding this amount will attract a lower rate of 19.00%.
Payment Service Banks will receive 25.75% on deposits up to ₦1.50 billion, with amounts above this threshold earning 19.00%.
These new rates are effective immediately, with all authorized dealers expected to adhere to the updated guidelines.
The CBN’s latest adjustments are expected to have broad implications for the banking sector. The central bank aims to curb excess liquidity, often a precursor to inflation by raising both SLF and SDF rates.
The reduction in interest rates for excess deposits is also intended to encourage banks to engage in more active lending rather than merely holding funds at the CBN.
The changes are likely to impact banks’ cost of funds, influencing the interest rates they offer to customers for loans and deposits.
While tighter liquidity conditions may lead to higher lending rates and potentially slower credit growth in the short term, the move could help stabilize inflation over time.
The increase in the SLF rate means that banks looking to borrow money from the central bank to cover short-term liquidity positions will now face higher interest costs.
Sector analysts often interpret reliance on the SLF as a sign of liquidity challenges, indicating that banks tapping into this facility may be under financial strain.
Backstory: The Central Bank of Nigeria (CBN) at its 296th MPC meeting had retained the liquidity ratio at 30% with the MPC emphasizing its commitment to stay on course with its tightening cycle given the urgent need to address inflationary pressures.
The bank continued its monetary policy tightening spree by raising interest rates by 50 basis points to 26.75% during its MPC meeting.
