CBN raises Standing Deposit Facility rates to manage liquidity 

The Central Bank of Nigeria (CBN) has increased the rates for the Standing Deposit Facility (SDF) as part of its ongoing efforts to manage liquidity in the financial system.

This decision was detailed in a circular issued on August 26, 2024, following the 296th Monetary Policy Committee (MPC) meeting, where key adjustments to interest rate policies were approved.

The CBN revised the Asymmetric Corridor around the Monetary Policy Rate (MPR) from +100/-300 basis points (bps) to +500/-100 bps. This significant shift aims to discourage banks from holding excess liquidity at the central bank and to promote increased lending activities.

New Operational Rates for Banks 

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.

What this means 

The CBN’s latest adjustments are expected to have broad implications for the banking sector. By raising both SLF and SDF rates, the central bank aims to curb excess liquidity, which is often a precursor to inflation.

• The reduction in interest rates for excess deposits is also intended to push banks toward more active lending rather than merely holding funds at the CBN.
• The changes are likely to impact the cost of funds for banks, influencing the interest rates offered to customers for both 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 in view of the urgent need to address inflationary pressures.

The bank during its MPC meeting continued its monetary policy tightening spree by raising interest rates by 50 basis points to 26.75%.