Interbank Rates Rise as FX Swap, Borrowing Suffocate Liquidity

Interbank Rates Rise as FX Swap, Borrowing Suffocate Liquidity

Interbank rates rose sharply due to huge outflows relating to FX swaps and activities of local banks in the Central Bank standing lending facility. Demand for funding increased as banks raised bets on Nigerian Treasury bills amidst exiting funding obligations for settlement of FX swaps.

According to information from the FMDQ, the open repo and overnight lending rates increased by 350 bps and 342 bps to 31.50% and 32.00%, respectively, in the absence of sufficient liquidity to counter the huge outflow.

In a note, investment banking firm CardinalStone Limited said the market was plunged into a debit position, largely due to liquidity drain from FX swaps and increased participation at the SLF window.

Banks have taken to the CBN window to meet funding needs amidst a Nigerian Treasury bill auction worth N670 billion offered to investors. The short-term interest rates are expected to spike further due to the settlement of the midweek Treasury bills auction.

The Nigerian Interbank Offered Rate (NIBOR) moved upward, indicating tight liquidity conditions within the banking system, Cowry Asset Limited said in a note. The market expects a net credit of ₦285.37 billion from Treasury bills redemption, with interbank rates likely to decrease, AIICO Capital Limited said.

System liquidity in the money market declined further in January 2025, deepening from a deficit of N236.3 billion in December to a negative N307.5 billion, Cowry Asset Limited said in a report.

Analysts said the decline was largely driven by FAAC allocations of N1.42 trillion, which reduced banks’ immediate borrowing needs, alongside the Central Bank of Nigeria’s (CBN) N500 billion Open Market Operation (OMO) auction at the beginning of the month.

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