Nigeria’s interbank lending rate surged to a five-year high of 28.58 percent in January 2025, reflecting the Central Bank of Nigeria’s (CBN) aggressive monetary tightening measures.
The interbank rate is the interest banks charge one another for short-term loans, typically overnight, to cover daily liquidity needs.
A rising rate signals tighter cash conditions, making it costlier for banks to access funds, which in turn raises borrowing costs for businesses and consumers.
Data from the CBN shows a dramatic rise in interbank rates over the past five years, with rates going from as low as 4.40 percent in January 2021 to a peak of 28.58 percent in January 2025.
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Analysts say this spike reflects the CBN’s shift from an expansionary stance in 2020, which kept borrowing costs low, to a much tighter policy aimed at controlling inflation.
Businesses face higher borrowing costs
“The spike in interbank rates aligns with the CBN’s tighter monetary stance,” said Ayokunle Olubunmi, head of financial institution ratings at Agusto & Co. “This has raised funding costs for businesses, with prime lending rates now exceeding 30 percent.”
Tilewa Adebajo, CEO of CFG Advisory, said the rising interbank rates reflect the Central Bank of Nigeria’s (CBN) decision to hike the Monetary Policy Rate (MPR) in an effort to curb inflation.
Over the past five years, the MPR—CBN’s benchmark interest rate—has climbed from 11.50 percent in 2021 to 27.50 percent currently, with a hefty chunk of that rise coming in the last one year during which the CBN hiked rates by an unprecedented 875 basis points.
While the tighter monetary policy has helped lower inflation—which dropped to 23.18 percent in February 2025 from 24.48 percent in January albeit following a rebasing exercise—it has also drained liquidity from the banking sector.
To curb excess cash, the CBN ramped up its Open Market Operations (OMO), selling N11.8 trillion in securities in 2024, a staggering 1,773.7 percent increase from N627.2 billion in 2023. OMO sales reduce the money supply by absorbing excess liquidity, making borrowing more expensive.
As of March 26, 2025, short-term borrowing rates have soared even further with Overnight lending rate hitting 32.83 percent and the Open repo rate at 32.42%.
Higher overnight lending rates indicate that banks are struggling to meet liquidity demands, forcing them to pay steeper interest rates for short-term funds.
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MPC member Aloysius Uche Ordu noted in his personal statement at the MPC meeting in February that while borrowing costs may begin to ease slightly, past rate hikes will continue to impact lending markets.
Businesses and consumers will likely face high borrowing costs in the near term as the CBN maintains its focus on stabilising the economy.
