Interbank Rates Increase as FX, OMO Debits Shrink Financial System Liquidity
The financial market has continue to price money at higher rates due to latest monetary policy tightening. This has filtered into the financial system deeply with short-term Benchmark interest adjusted to double-digit highs.
In the just concluded week, interbank rates climbed significantly in the money market due to strained liquidity balance in the financial system, according to data from the FMDQ platform.
The short term benchmark interest rates have adjusted to the monetary policy hawkish pose in a bid to fight off inflation drivers, which includes excessive money supply.
The Apex Bank increased monetary policy rate and cash reserve ratio (CRR) to 27.25% and 50.0% respectively, thus keeping substantial portion of bank deposits with the authority, limiting liquidity and constraining interbank lending, Afrinvest said.
Data obtained from the market revealed that liquidity level in the financial system started with a credit balance of around ₦709 billion, AIICO Capital Limited said in an emailed note but dropped by over ₦1.4 trillion last week.
According to market analysts, the decrease was caused outflow related to the Central Bank of Nigeria’s (CBN) foreign currency market (FX) intervention settlements.
The market also witnessed outflow related to cash reserves ratio (CRR) debit on banks, and OMO auction settlements, despite some inflows from different sources.
Total outflow relating to OMO bills auction was N731.14 billion, Cash Reserves ratio debit was N110 billion while FX sales intervention reduced the liquidity level by additional sum of N98 billion.
Analysts said the amount that exited the system overwhelmed Remita inflows, Swap maturities, FGN bond coupon inflows and FCT Signature Bonus, which bolstered the balance in the financial market.
As a result, the interbank rates notably rose, with the Open Repo Rate (OPR) and the Overnight Rate (O/N) increasing by 2.54% and 2.80% to 32.23% and 32.77%, respectively, analysts said.
As a result, the average system liquidity settled at a net short position of NGN174.26 billion, from a net long position of NGN462.09 billion in the previous week, Cordros Capital Limited, said in a note.
“We expect the overnight lending rate to remain elevated in the absence of any notable inflows to support the financial system amid a possible net issuance at the Wednesday Nigerian Treasury Bills auction”, the firm said.
In September, system liquidity received intermittent boost from Federal accounts allocation committee (FAAC) inflow totaling N903.4 billion, Afrinvest Limited said.
However, this inflow was moderated total outflows of about N1.34 trillion on account of CBN’s Treasury bills sales outflow of N622.7 billion and OMO auctions worth N712.5 billion.
Nevertheless, system liquidity closed higher at ₦253.6 billion in September from the negative close in August. #Interbank Rates Increase as FX, OMO Debits Shrink Financial System Liquidity
