The Central Bank of Nigeria (CBN) has raised the rates for the Standing Deposit Facility (SDF) as part of its ongoing strategy to manage liquidity in the financial system.
This decision was outlined in a circular released on August 26, 2024, following the 296th Monetary Policy Committee (MPC) meeting, where significant adjustments to interest rate policies were approved.
The CBN adjusted the Asymmetric Corridor around the Monetary Policy Rate (MPR) from +100/-300 basis points (bps) to +500/-100 bps.
This notable change is intended to discourage banks from maintaining excess liquidity at the central bank and to encourage more lending.
New Operational Rates for Banks
The Standing Lending Facility (SLF) rate, which banks use to borrow short-term funds from the CBN, has been increased to 31.75%.
The SDF rate, which applies to deposits made by banks at the CBN, has been raised to 25.75%. The circular also specifies the following:
– 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, and all authorized dealers are expected to comply with the updated guidelines.
Implications
The CBN’s latest adjustments are likely to have significant effects on the banking sector.
By increasing both SLF and SDF rates, the central bank aims to reduce excess liquidity, which is often a precursor to inflation.
The reduction in interest rates for excess deposits is also intended to encourage banks to engage in more active lending rather than simply holding funds at the CBN.
These changes are expected to influence the cost of funds for banks, affecting the interest rates offered to customers for both loans and deposits.
While tighter liquidity conditions may result in higher lending rates and potentially slower credit growth in the short term, this move could help stabilize inflation over time.
The increase in the SLF rate means that banks seeking to borrow funds from the central bank to cover short-term liquidity needs will now face higher interest costs.
Sector analysts often view reliance on the SLF as a sign of liquidity challenges, indicating that banks utilizing this facility may be under financial strain.
Background:
During its 296th MPC meeting, the Central Bank of Nigeria (CBN) maintained the liquidity ratio at 30%, with the MPC emphasizing its commitment to continue its tightening cycle to address inflationary pressures.
In line with this, the bank raised interest rates by 50 basis points to 26.75%.
 has raised the rates for the Standing Deposit Facility (SDF) as part of its ongoing strategy to manage liquidity in the financial system.){kind=link}