Interbank Rates Rise as Funding Pressures Weigh on Liquidity
Signature bonus, Remita inflows, and government contractor payments failed to tame the interbank rates movement last week. Interbank rates increased at the close of trading activities in the money market as a result of higher funding requests on liquidity balance in the financial system.
The short-term benchmark interest rates rose on account of strain in financial liquidity in the money market last week. Market analysts explained that rates are more likely to decline in the new week due to a positive liquidity close in the money market in the absence of significant funding pressure.
In a note, investment firm TrustBanc Financial Group reported that system liquidity advanced further, closing the week with a positive balance of N871.20 billion. This represents a 147% increase from the previous day’s surplus of N353.26 billion.
Banking system liquidity was negative, settling at a N166 billion shortfall at midweek activities following OMO auction debit. Analysts explained that the money market opened with a robust liquidity position of N846.78 billion, primarily driven by inflows of nearly N600 billion from contractor payments.
According to AIICO Capital Limited, the system began with significant inflows from Remita, which helped drive interbank rates lower, with the Overnight Policy Rate (OPR) falling to 26.50% and the Overnight Rate (O/N) decreasing to 27.14%.
On Tuesday, the Central Bank of Nigeria (CBN) conducted an OMO auction, selling N500 billion worth of OMO bills, which temporarily pushed the system into a deficit.
The outflow or net settlement for the OMO bills auctioned tightened liquidity levels in the money market midweek, along with net debits via the cash reserve ratio maintenance debits by the CBN.
Then, this increase in demand pushed interbank rates up to between 28% and 30%, AIICO Capital Limited said. Later in the week, liquidity rebounded, supported by inflows from a signature bonus and Remita credits.
But analysts hinted that the liquidity rebounded strongly in the money, setting the year on a positive trajectory, according to TrustBanc. Notably, inflows from Deposit Money Banks (DMBs) into the Standing Deposit Facility (SDF) surged by 76%, contributing to the system’s robust close for the week.
The ample liquidity observed during the week kept interbank funding rates (OPR and O/N) around 27%, with both rates eventually closing on Friday at 26.75% and 27.25%, respectively. Barring any significant outflows from the system, the current liquidity balance is expected to remain stable, with funding rates likely trading at similar levels in the coming week, TrustBanc said in a note.
Despite these fluctuations, the open repo rate saw a slight increase of 25 bps, rising to 26.75%, while the rate increased by 14 bps w/w, reaching 27.25%. Cordros Capital Limited said in its report that the average liquidity closed at a net long position of N471.76 billion as against a net short position of N402.18 billion in the prior week. #Interbank Rates Rise as Funding Pressures Weigh on Liquidity Naira Rises as Gross External Reserves Hits 3-Year High
