Money Market Rates Surge on Deficit Liquidity in Banking System

Money Market Rates Surge on Deficit Liquidity in Banking System

Money market rates were tightened due to a negative liquidity balance in the banking system. The market had opened on a strong note before outflows relating to auction sales dampened liquidity balance.

Plus, there was an outflow relating to cash reserve maintenance debited against the liquidity balance in the financial system last week. Hence, some local lenders access funds from the Central Bank of Nigeria (CBN) as funding levels are drained up.  The financial system opened with a credit of N398.31 billion last week, according to AIICO Capital Limited.

Due to auctions, there was a significant decrease of ₦923.80 billion in the system, which closed the week in a deficit of ₦525.49 billion.

Analysts attributed the sharp reduction in the liquidity balance to the settlement of OMO auctions totaling ₦1.447 trillion and net cash reserves ratio (CRR) debits.  Despite substantial Remita inflows credited to the system, these funding activities pushed the market into a deficit position, AIICO Capital Limited told investors in a note.

According to data from the FMDQ platform, the short-term benchmark interest rates climbed to double digits high levels in the market.

The Nigerian Interbank Offered Rate (NIBOR) increased across most maturities, indicating tight liquidity within the banking system, Cowry Asset Limited also stated in an update. Thus, the repo rate increased by 12.73% to 31.95%, while the overnight lending rate surged by 12.80% to 32.48% week-on-week.

“We anticipate that rates will stay elevated, even with the inflows from SWAP maturities and FGN bond coupons,” analysts at AIICO Capital Limited said in a note. At the beginning of last week, banks enjoyed a comfortable liquidity position exceeding N200 billion, buoyed by limited funding obligations, TrustBanc Capital Limited said in its market update.

However, Wednesday through Friday, the combined outflow of OMO and NTB auction settlements totaling ₦1.54 trillion swept the system into a sea of red for three consecutive days.

Accordingly, interbank funding rates hovered at 19% levels at the start of the week, until Wednesday, when increased funding obligations pushed rates above 30%. “With liquidity expected to stay tight in the coming week, interbank rates are likely to remain elevated.”.

In October, Nigeria’s interbank market experienced liquidity pressure, primarily driven by CBN’s FX interventions, CRR debits, and frequent OMO auction settlements. Analysts noted that the market began with a significant credit of ₦709.32 billion in October, but liquidity sharply declined throughout the period, averaging a debit of -₦579.71 billion in the month.

This was, however, a decline when compared with the average negative liquidity balance of ₦26.13 billion in September. There were series of huge inflows that saturated the financial system in the period. FAAC disbursements, Remita credits, and other state inflows temporarily eased liquidity pressures in mid-October, with interbank rates reaching a low of 19%-25% by month-end.

However, funding pressures remained high, with rates spiking up to 34% during peak OMO settlements and closing around 26%-27% after FAAC inflows. At the end of the month, the open repo rate and overnight lending rate (OVN) rose by 2.92% and 2.78%, averaging 30.59% and 30.99%, respectively. #Money Market Rates Surge on Deficit Liquidity in Banking System Equities Investors Wealth Rises as Nigerian Exchange Rally