Nigeria’s interbank lending rate surged to 28.58 percent in January 2025, the highest level in five years as the Central Bank of Nigeria (CBN) intensified its monetary policy tightening to address persistent inflationary pressures and stabilise the naira.
The sharp increase reflects the cumulative effect of sustained liquidity shortages in the banking system and the apex bank’s hawkish policy stance.
The interbank rate, which dictates the short-term borrowing cost among banks, has consistently risen over the past year following successive interest rate hikes by the CBN.
Official data show that the interbank rate has moved from 4.40 percent in January 2021 to 28.58 percent in January 2025.
This jump aligns with the CBN’s policy objectives aimed at curbing inflation, which has remained above target despite previous interventions.
The CBN’s Monetary Policy Rate (MPR) currently stands at 27.50 percent, up from 11.50 percent in 2021, representing an accumulated 1,100 basis points increase over the period.
The apex bank accelerated its tightening pace between early 2024 and early 2025, accounting for more than 800 basis points of the adjustment within twelve months.
Liquidity conditions in the banking sector have tightened further due to the CBN’s aggressive deployment of Open Market Operations (OMO).
In 2024, the CBN recorded OMO sales of N11.8 trillion, significantly higher than the N627.2 billion recorded in 2023. The mop-up of excess liquidity has led to elevated short-term interest rates across the interbank market.
As of the end of March 2025, the Overnight Lending Rate reached 32.83 percent while the Open Repo Rate stood at 32.42 percent, both reflecting worsening liquidity conditions.
The funding cost for banks has risen sharply, compelling them to pass on the burden to businesses and households through higher lending rates.
Financial market analysts have expressed concerns about the negative implications for private sector borrowing. Businesses, particularly small and medium-sized enterprises (SMEs), are now confronted with elevated borrowing costs, limiting access to credit and constraining investment and consumption.
Despite the elevated rates, inflation remains above the CBN’s medium-term target.
Inflation declined modestly from 24.48 percent in January to 23.18 percent in February 2025, partly due to the restrictive monetary policy and ongoing exchange rate adjustments.
Market participants expect the current tight monetary conditions to persist in the near term as the CBN maintains its focus on price and exchange rate stability.
However, the high-interest-rate environment is likely to limit credit creation, slow economic activities, and further strain sectors that rely heavily on bank financing.
