CBN to Borrow at 4.5% from SDF, Lend to Banks at 12.5%
Following the Monetary Policy Committee’s decision to lower the discount window rates, the Central Bank of Nigeria will begin to borrow from deposits money banks at 4.5% while lending to operators would be priced at 12.5%.
The adjustment made to MPR asymmetric corridor reference cost of obtaining funds from Standing Deposits Facility (SDF), and CBN lends to Bank through Standing Lending Facility (SLF).
It would be recalled that the Monetary Policy Committee of the CBN hacked policy rate by 100 basis points to 11.5% on Tuesday.
The MPC adjusted the asymmetric corridor around the MPR was adjusted to +100/-700 basis points from +200/-500 basis points.
Analysts said this indicates that CBN would borrow from Banks at (MPR -700 bps) or 4.5% while lending to operators at (MPR +100 bps) or 12.5%.
After adjusting the policy rate only three times in its prior 25-meetings, the committee has now reduced the MPR twice in 7 months in 2020 in response to current growth concerns.
“This corridor adjustment suggests that the CBN will now borrow from banks at MPR minus 700bps (4.5%) and lend to them at MPR + 100 bps (12.5%).
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In the money market, Chapel Hill Denham said in line with expectation, funding pressure remain largely benign as financial system liquidity opened at ₦532 billion from ₦533 billion.
Consequently, the Overnight (OVN) rate moderated by 25bps to 1.75%, while the Open Buy Back (OBB) rate closed flat at 1.00%.
Chapel Hill Denham expects the financial system to remain liquid, supported by Open Market Operations (OMO) maturities on Thursday worth ₦300 billion and a bond coupon payment Wednesday of about ₦18 billion.
However, analysts said funding pressures may resurface on Friday due to settlement of the Debt Management Office (DMO) monthly bond auction, as well as provisioning for the retail FX auction.
Despite the buoyant liquidity in the financial system, the market traded with caution ahead of MPC decision.
At the front end of the curve, discount rates on benchmark Nigerian Treasury Bills (NTBs) closed flat at an average of 1.74%.
However, OMO bills traded bullish, with benchmark bills compressing by an average of 17bps to 1.96%.
In the bond market, analysts at Chapel Hill said they observed duration aversion, as long term bonds closed flat, while yields on short and intermediate bonds declined by 1bp and 4bps respectively.
As a result, yields on the benchmark bond yield curve moderated by an average of 2bps to 7.27%.
Chapel Hill Denham said against consensus expectation, the 2-day MPC meeting ended with a dovish outcome as Committee trimmed the benchmark policy rate by 100bps to 11.50%.
The investment firm explained that the adjustment made effectively cuts the Standing Deposit Facility (SDF) rate by 300ps to 4.5% and the Standing Lending Facility (SLF) rate by 200bps to 12.50%.
Analysts said the impact of the MPC’s decisions on the fixed income market is dullish in the short term, but liquidity will play a greater role in determining the direction of yields over the medium term.
In the meantime, attention will now shift to the DMO bond auction holding today folllowing its plans to issue up to ₦145bn at the auction.
This will be split between JAN 2026 (₦25 billion), MAR 2035 (₦40 billion), JUL 2045 (₦40 billion) and MAR 2050 (₦40 billion) bonds.
The previous auction closed at 6.7%, 9.35%, 9.75% and 9.90% respectively.
“We expect a well bid auction, due to the MPC’s decision, and supportive liquidity backdrop”, Chapel Hill Denham stated.
CBN to Borrow at 4.5% from SDF, Lend to Banks at 12.5%
