Liquidity Crunch in Banking System Keeps Rates Elevated
The short-term benchmark interest rates stayed elevated at over 32% in the money market as the liquidity crunch in the banking system persisted ahead of the Nigerian Treasury bills auction scheduled for midweek.
The CBN liquidity mop-up actions were reduced as the financial system has already been tightened as a result of the cash reserve ratio, foreign exchange market, and AMCON levy settlement.
This has fueled higher rates for market participants. Cash-rich banks and investment managers boost income from higher rates via some money market-related instruments or placements.
The market anticipates the Central Bank of Nigeria (CBN) will float N290 billion worth of Treasury bills at its primary market auction scheduled for Wednesday. The amount is expected to be used to refinance maturing bills, which analysts think could be overallotted given the absence of monetary actions in the recent past week.
Despite a coupon inflow of N74.34 billion on Tuesday, the financial system liquidity remained in deficit at N400.70 billion, AIICO Capital Limited told investors in a note. Banks were noted to have pitched their tents at the CBN standing lending facility (CBN) for borrowing amidst tightening liquidity levels in the market.
Funding rates were mixed, with the open repo rate (OPR) rising by 8 basis points to 32.50% in the absence of significant inflows, while the overnight lending rate declined by 8 bps to 32.75%.
Analysts said this suggests that short-term interest rates on borrowing will be heavily priced as local deposit money banks with excess liquidity begin to demand higher rates.
The market anticipated coupon inflows of about N29.58 billion to enhance system liquidity. Nonetheless, rates are expected to remain around the same level as investors pay attention to the MPC decision on future liquidity.
The Nigerian Treasury Bills (NITTY) curve recorded yield declines across most maturities. However, trading activity in the secondary market remained largely muted, as the average yield dipped by 5 basis points to 17.72%. #Liquidity Crunch in Banking System Keeps Rates Elevated MPC Keeps Interest Rate Benchmark at 27.5%
