Excess Liquidity Tames Rates Spike Episodes Ahead of OMO Inflow
Excess liquidity in the financial system has continued to tame rate spike episodes in the money market, and some analysts sense the trend could persist ahead of huge net inflows in the new week.
The interbank rates diverged on the back of an ample liquidity level in the banking system last week, according to reports obtained on the Nigerian money market.
Banks’ borrowing activities at the Central Bank Standing Lending Facility (SLF) reduced in the absence of funding pressures, a slew of analysts said.
There was a minimal funding rotation that could trigger money market indicators strongly in the absence of liquidity mop-up actions. The short-term benchmark interest rates were relatively stable around 27% as substantial liquidity eased funding pressures.
The open repo and overnight lending rates were relatively uptight as the market anticipated a net inflow of about N1.1 trillion in the new week. The financial system liquidity was supported by cumulative inflows totaling ₦363.13 billion, AIICO Capital Limited said in an update.
The investment firm listed key drivers of the liquidity level seen last week to include ₦264 billion in OMO maturities, 13% derivation fund disbursements to states by the CBN, and ₦81.84 billion in Nigerian Treasuries that matured.
These inflows offset net cash reserve ratio debits at deposit money banks and ensured market stability. As a result, the Overnight Policy Rate (OPR) held steady at 26.50% throughout the week, while the overnight (O/N) rate edged up slightly by 3 bps to 26.99%.
In the new week, the market expects N985.88 billion from matured OMO bills to significantly boost the financial system’s liquidity. Analysts also reported that there will be additional inflows totalling N27.2 billion from maturing Treasury bills and N216.4 billion from FGN bond coupon payments.
However, concurrent outflows that are expected to impact money market rates in the new week include CBN’s currency swap settlement with deposit money banks and net Treasury bills funding of about N134 billion.
According to AIICO Capital Limited, these liquidity drains could tighten market conditions, potentially driving interbank rates toward 30%. Analysts at AAG Capital Limited added that the market is likely to react to the inflation data, as investors weigh its implications for the monetary policy committee’s decision at next month’s meeting.
In May, Nigeria’s interbank market remained well supported by consistent liquidity, despite active efforts by the CBN to manage excess cash through aggressive OMO auctions.
Analysts recall that the month began with a strong liquidity position and ended with an average system liquidity balance of ₦907.33 billion, higher than the previous month’s ₦836.49 billion.
This resilience was underpinned by large OMO maturities exceeding ₦2.36 trillion, inflows from FGN bond coupons, derivation funds, and Sukuk allocations.
Although liquidity was periodically drained by over ₦2.1 trillion in OMO auctions, FX settlements, CRR debits, and sovereign bond settlements, strong subscription levels at CBN auctions signalled investor confidence.
Despite these dynamics, interbank rates remained broadly stable, AIICO Capital Limited said. The average Open Repo Rate declined slightly by 13 bps month on month to 26.68%, while the Overnight Rate moderated by 6 bps m/m to close at 27.18%.
Analysts expect funding conditions to remain driven by CBN policy decisions, with expectations for continued monetary tightening. The bank will likely persist with CRR adjustments and OMO auctions as primary liquidity management tools. #Excess Liquidity Tames Rates Spike Episodes Ahead of OMO Inflow#
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