Interbank Rates Mixed as Banking System Liquidity Sinks by 21%
Interbank rates were mixed last week as banking system liquidity declined by approximately 21% to close at about N3 trillion. The liquidity drop was primarily attributed to outflows associated with Open Market Operations (OMO) and the settlement of Nigerian Treasury bills auctions.
The prevailing short-term benchmark interest rates now hover above 22%, reflecting Nigeria’s hawkish monetary policy, which incentivises money market placements at higher rates.
Reflecting tight lending appetite, Deposit Money Banks are increasingly placing large amounts in the Central Bank of Nigeria’s (CBN) Standing Deposit Facility (SDF) to capture rates that currently surpass the returns available from Treasury bills.
Liquidity in the Nigerian money market tightened further, with a substantial N3.4 trillion in settlement for the CBN’s OMO and Treasury bills primary market auction sales last week.
Market analysts said funding pressures mounted as the settlement of N1.20 trillion in Nigerian Treasury Bills and N2.19 trillion in OMO auctions drained a considerable amount of liquidity from the banking system.
Investment firm Cowry Asset Limited reported that total financial system liquidity fell by 20.68%, dropping from N3.78 trillion to N2.99 trillion week-over-week.
Despite this decline, liquidity remains firmly in surplus, highlighting the resilience of banking system funding against the backdrop of Nigeria’s stringent monetary policy aimed at curbing inflation and managing excess liquidity.
In terms of money market rates, overall stability was observed despite the liquidity crunch. The Open Repo Rate (OPR) remained steady at 22.00%, while the Overnight (OVN) rate increased slightly by 2 basis points, reaching 22.14%.
This indicates that short-term funding conditions remain relatively comfortable.
However, funding costs on the Nigerian Interbank Offered Rate (NIBOR) curve increased beyond the overnight tenor, with one-month, three-month, and six-month rates rising by 25bps, 45bps, and 58bps to settle at 22.70%, 23.22%, and 23.67%, respectively.
Meanwhile, the overnight NIBOR decreased slightly by 3bps to 22.21%.
The upward adjustment of medium- to long-term interbank rates reflects market expectations that the CBN will maintain its restrictive monetary policy stance, particularly following its decision to keep the Monetary Policy Rate (MPR) unchanged at 26.50%, said Cowry Asset Limited in a note.
Interbank rates diverged as liquidity balance in the banking system declined by about 21% last week due to outflows related to OMO and Nigerian Treasury bills auction settlements.
The short-term benchmark interest rates hovered above 22%, reflecting Nigeria’s hawkish monetary policy tone, which pays a premium on money market assets.
Deposit Money Banks continue to maintain huge placements at the Central Bank of Nigeria (CBN) Standing Deposit Facility (SDF) to earn rates currently above the equivalent return in Treasury bills.
The Nigerian money market liquidity was, however, tightened with N3.4 trillion in settlement for the CBN OMO and Treasury bills allotment to investors last week.
Funding rates came under pressure following the settlement of N1.20 trillion in Nigerian Treasury Bills (NTBs) and N2.19 trillion in Open Market Operations (OMO) auctions, which significantly drained liquidity from the banking system.
In its market update obtained by MarketForces Africa, investment firm Cowry Asset Limited said the financial system liquidity declined by 20.68% to N2.99 trillion from N3.78 trillion in the previous week.
Despite this moderation, liquidity remained firmly in surplus, underscoring the resilience of banking system funding despite Nigeria’s tight monetary policy stance aimed at containing inflation and managing excess liquidity.
Money market rates remained broadly stable despite the liquidity squeeze, Cowry Asset Management Limited said in the note.
The Open Repo Rate (OPR) was unchanged at 22.00%, while the Overnight (OVN) rate edged up marginally by 2 basis points to 22.14%, indicating that short-term funding conditions remained relatively comfortable.
Across the Nigerian Interbank Offered Rate (NIBOR) curve, however, funding costs rose beyond the overnight tenor as the one-month, three-month, and six-month rates increased by 25bps, 45bps, and 58bps to 22.70%, 23.22%, and 23.67%, respectively, while the overnight NIBOR eased slightly by 3bps to 22.21%.
“The upward repricing of medium- to long-term interbank rates reflects market expectations that the CBN will sustain its restrictive monetary policy stance following its decision to retain the Monetary Policy Rate (MPR) at 26.50%”, the investment firm stated. CBN Auctioned N600bn in OMO Bills, Raises N3.5trn at 20%
