Banks pass on rate hikes faster than cuts, IMF says

Nigeria’s banking sector is quick to pass higher interest rates on to borrowers but much slower to deliver relief when monetary policy eases, according to a new International Monetary Fund (IMF) assessment that sheds light on one of the most important channels through which monetary policy affects households and businesses.

The finding comes as Nigeria undergoes one of the most significant transformations of its monetary and foreign exchange framework in decades following the unification of the foreign exchange market in June 2023 and the subsequent transition to a floating exchange rate regime.

While much attention has focused on the impact of the reforms on the naira and inflation, the IMF says a critical but less discussed development is the changing way monetary policy is transmitted through the financial system and, ultimately, to consumers and businesses.

In a Selected Issues Paper accompanying its latest Article IV consultation on Nigeria, the Fund found that the effectiveness of interest rate transmission has improved considerably since the foreign exchange reforms. However, it also identified a significant asymmetry in how banks respond to changes in the Central Bank of Nigeria’s Monetary Policy Rate (MPR).

“Interest rate transmission displays a clear ‘rockets-and-feathers’ pattern, with borrowing rates adjusting upward rapidly during tightening cycles but declining only gradually when policy is eased,” the IMF said.

The implication is straightforward but important for businesses and households. When the Central Bank raises interest rates to combat inflation, banks respond quickly by increasing lending rates. But when the policy environment…