Nigeria’s Rate Recalibration Credit Positive for Banks – Moody’s
Nigeria’s recent monetary policy rate recalibration is credit positive for deposit money banks (DMBs), Moody’s Ratings said in a non-rating commentary note.
The Central Bank of Nigeria (CBN) lowered its monetary policy rate (MPR) by 350 basis points (bp) to 23% from 26.5%, and recalibrated the standing facilities corridor around the MPR to 50 bp to negative 300 bp from 50 bp to negative 450 bp previously.
According to Moody’s, the recalibration follows the April introduction of the Nigerian Overnight Financing Rate (NOFR), a transaction-based benchmark for overnight secured naira funding in the interbank market.
It said NOFR has increased transparency around prevailing money market funding conditions and, consequently, around the gap between these rates and the MPR.
The CBN’s recalibration of its key rate aims to strengthen monetary policy transmission and restore the rate as the primary policy signal by narrowing its spread to prevailing market rates, a credit positive for banks, Moody’s stated.
The ratings agency said better policy pass-through predictability would improve macroeconomic stability and visibility for balance sheet management.
“It would also make banks’ margins more sensitive to changes in policy rates, with varying effects depending on deposit mix, hedging and liquidity management.
“However, we expect the benefits of stronger transmission to outweigh the potential challenges of increased sensitivity”, Moody’s said.
The agency said it expects the MPR recalibration to enhance the credibility of the policy signal because narrowing the spread between the policy rate and prevailing market rates and repositioning the interest-rate corridor better align the monetary policy implementation framework with market realities.
It added that improvement in Nigeria’s foreign exchange management framework has also helped reduce some of the constraints on monetary policy transmission. Moody’s said other constraints to monetary policy transmission include excess naira liquidity in the banking system.
It reflects government-related flows, shallow and fragmented money markets, operational inefficiencies in the liquidity management framework and spillovers from the foreign exchange market.
The weighted average NOFR was 22% on 22 September, 450 bp below the previous MPR of 26.5% and in line with the previous 22% standing deposit facility rate, the floor of the interest rate corridor.
The NOFR rate may have reflected excess naira liquidity in the banking system, which may have contributed to pushing market rates toward the effective floor set by the rate at which the central bank remunerates banks’ deposits, Moody’s said.
Following the recalibration, the new MPR of 23% is now only 100 bp above the NOFR, while the revised corridor places the NOFR well within its 20%–23.5% range, defined by the standing deposit facility and standing lending facility rates.
The CBN emphasised that the recalibration does not constitute a change in the current monetary policy stance, and that the supportive macroeconomic environment allows for such an operational reset without undermining the disinflation process.
The authorities explicitly framed the measure as an effort to restore the effectiveness of the MPR, acknowledging the disconnect between policy and market rates.
“Their acknowledgement is consistent with our assessment of weak Monetary and Macroeconomic Policy Effectiveness, reflected in Nigeria’s “b” score for that subfactor.
“While the recalibration may help improve monetary policy transmission over time, we do not expect substantial monetary policy easing in 2026 given our view that inflationary pressures will recede only gradually”.
Consequently, high interest payments will keep debt affordability weak and limit the government’s fiscal flexibility, Moody’s said in its non-rating commentary note.
