The interbank rate fell to 10.4998 percent on Thursday last week --the lowest level since December 2023-- on the back of the CBK cutting its key lending rate to 10.75 percent earlier this month from 11.25 percent previously.
The lower interbank rate is indicative of falling borrowing costs among commercial banks on the short-term credit facilities, benefitting institutions that regularly use this funding window.
Interbank lending rates have closely tracked the Central Bank Rate (CBR) since the adoption of a new monetary policy implementation framework in August 2023 which seeks to enhance the transmission of CBK policy decisions in the money markets.
The framework, which is based on inflation targeting has an established interest rate corridor around the CBR at 150 basis points or 1.5 percent.
This implies that the interbank lending rates must never fall or rise above the CBR by the 1.5 percentage point margin. Institutions that cannot access funding from the interbank market can turn to the regulator's discount window -- an emergency facility.
“Consistent with the new framework, monetary policy operations are aimed at ensuring the interbank rate as an operating target closely tracks the central bank rate,” the CBK notes.
The regulator has trimmed its benchmark lending rate four times since August last year, moving the CBR from a multi-year high 13 percent, allowing interbank lending rates to reset downwards in unison.
Commercial banks have meanwhile ramped up the transmission of CBK’s policy decision by announcing significant cuts to their internal base lending rates this month.
Domestic interest rates including yields on Treasury bills and bonds have eased following the end of investor jitters surrounding the State of the macro-economy including the risk of a sovereign default, price and exchange rate instability in the past 12 months.
The recent stability of the macro-drivers has allowed the CBK to undertake its first-interest rate cuts since the pandemic years, allowing for the reset in domestic rates.
Both inflation and exchange rate stability are expected to prevail over the short to medium term, allowing local rates to remain subdued from the 2024 highs, supporting relatively lower borrowing rates for customers and funding costs for banks.
