Banking Sector Liquidity Rises By N1.7tn To N5.73tn After CBN MPR Adjustments

…Banks Eye Safer Returns As MPR Adjustment Boosts SDF Placements

System liquidity in Nigeria’s financial markets surged to an unprecedented N5.73tn on Monday, climbing sharply from N4.02 trillion recorded just three days earlier.

The surge was triggered by the Central Bank of Nigeria’s (CBN) latest policy moves aimed at recalibrating monetary conditions, boosting confidence, and ensuring stability in the financial system.

At its 302nd Monetary Policy Committee (MPC) meeting held last week, the CBN lowered the Monetary Policy Rate (MPR) by 50 basis points, bringing it down to 27 percent.

This marked the first downward adjustment in the benchmark rate since November 2024 and signaled a cautious but deliberate shift towards easing monetary policy.

In addition, the CBN announced a revision of the Standing Facilities corridor, the interest rate band within which banks can borrow from or deposit with the CBN.

The corridor, previously set at +500/-100 basis points around the MPR, was narrowed to +250/-250 basis points.

This realignment was designed to make the Standard Deposit Facility (SDF) more attractive while discouraging excessive borrowing at the lending window.

The policy adjustments had an immediate impact on the liquidity management framework as placements in the SDF hit N5.39tn, reflecting banks’ preference for safe, interest-earning deposits with the CBN rather than deploying funds into the broader credit market.

The SDF, which allows banks to park surplus cash with the apex bank overnight, effectively sterilizes excess liquidity while providing banks with a secure return.

By incentivizing banks to channel idle funds into the SDF, the CBN ensures that short-term interest rates remain within its target range, thereby reducing volatility in the money market. Analysts note that this dynamic has helped the CBN strike a balance between accommodating liquidity and preventing runaway inflation.

The adjustments also come against the backdrop of moderating inflationary pressures. Nigeria’s headline inflation rate slowed for the fifth consecutive month in August 2025, settling at 20.12 percent.

While still elevated, the downward trend has created room for the MPC to cautiously loosen its stance without undermining price stability.

For the CBN, this provides an opportunity to support credit expansion, stimulate business activity, and sustain growth, particularly as the economy grapples with sluggish consumer demand and elevated borrowing costs.

Since the MPC’s announcement, system liquidity has ballooned. From N2.12tn at the start of last week, liquidity has more than doubled, touching the historic N5.73tn mark.

Much of this rise has been attributed to flows into the SDF window, as commercial banks took advantage of the more favorable corridor to lock up excess funds.

The surge has had ripple effects across the financial markets, with interbank lending rates dropping to their lowest levels in almost a year.

On September 24, the Open Buy Back (OBB) rate fell sharply to 24.5 percent, while the overnight rate declined to 24.88 percent. Both rates are at their lowest levels since early November 2024, underscoring how improved liquidity is easing short-term borrowing costs.

Speaking on the development, Abigael Kazeem-Adeshina, a Research Analyst at Norrenberger Financial Group, described the CBN’s approach as “a delicate balancing act.”

According to her, “The policy adjustments are designed to ease rates in line with market expectations while still keeping monetary conditions under control through the corridor mechanism, especially after the recent reduction in the Cash Reserve Ratio (CRR).”

Kazeem-Adeshina added that another moderate rate cut could be on the horizon in November, depending on inflation dynamics in September and October. “If the downward trend in inflation persists, the MPC may see further room to adjust policy in favor of growth,” she said.

While the surge in liquidity highlights the effectiveness of the CBN’s tools in stabilizing money markets, concerns remain about its impact on the real economy. Much of the liquidity is effectively sterilized at the apex bank, meaning that funds are not immediately channeled into productive lending for households or businesses.

This strategy, though useful in containing inflationary risks, could slow down credit expansion, particularly at a time when businesses are clamoring for cheaper funding to sustain operations.

Analysts warn that if excess liquidity continues to remain locked within the CBN’s vaults, the expected boost to economic growth may not materialize quickly.
At the same time, the policy is seen as a safeguard against rising non-performing loans (NPLs), which stood at 6.03 percent in Q1 2025. By encouraging banks to place surplus funds with the CBN rather than chase risky lending opportunities, the apex bank is reducing the likelihood of further deterioration in asset quality.