Following decisions at the last Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria (CBN) has increased the rates for the Standing Deposit Facility (SDF) in its continued efforts at managing liquidity as well as stability of the financial system.
This decision was contained in a circular issued on August 26, 2024 to deposit money banks.
At the 296th meeting, CBN’s MPC revised the Asymmetric Corridor around the Monetary Policy Rate (MPR) from +100/-300 basis points (bps) to +500/-100 bps.
The shift was to discourage banks from holding excess liquidity at the central bank and to promote increased lending activities.
Specifically, banks use SLF rate to borrow short-term funds from the CBN, and under the new policy, the rate has been raised to 31.75%.
The SDF rate, on the other hand, is now at 25.75%.
Consequently, according to the circular which takes immediate effect, 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%.
Analysts say, beside tackling perceived excess liquidity in the system, with consequential impact on inflation, the SLF will make banks to review the rates charged on facilities to customers.
Similarly , 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.
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.
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But, the analysts frown at the discretionary lending, usually in favour of high networth individuals and blue chip companies.
They also allege that concentration on oil and.gas sectors for credits at the expense of the real sector of the economy is detrimental to growth and development.
However, they say that the increase in the SLF rate is expected to checkmate banks that usually depend on either CBN or interbank transactions to cover short-term liquidity positions as they will now face higher interest costs.
CBN, at the 296th MPC meeting continued with its monetary policy tightening stance, raising interest rates by 50 basis points to 26.75%.
