Money Market Rates Rise Sharply as OMO Debit Drags Liquidity
The short-term benchmark interest rates increased sharply in the money market due to huge outflows associated with open market operations (OMO bills) auction payments that left the financial system on Tuesday.
Rates reacted negatively to reduce liquidity level as reflected in share increase in Nigerian interbank offered rate.. The net balance in the financial system declined to N322 billion on Tuesday, analysts at Futureview Financial Limited said in an emailed note to investors.
Investment bankers at Cowry Asset Limited said the interbank offered rate rose sharply by 2.68% to 23.71%, reflecting tightening liquidity. The significant daily surge in interbank lending came under pressure following the N459 billion underwriting by Money Market Dealers (MMDs).
Also, the 1-month, 3-month, and 6-month Nigerian interbank offered rates climbed to 23.99%, 24.75%, and 25.74%, respectively, the firm said. Data from the FMDQ platform confirmed that key money market indicators: the open repo rate and overnight rate also increased. Highlighting the strain on liquidity within the system.
Analysts at Cordros Capital Limited said the overnight lending rate expanded by 123 basis points to close the day at 23.5% following debits for the OMO auction totalling N459.60 billion.
The apex bank sold OMO Bills in the primary market at the beginning of the week, offering N500 billion across standard maturities to market participants.
Auction result showed that spot rate also decline by 2 basis points. Due to strain on funding level, the open repo rate increased by 129 bps to 22.97%, and the overnight rate rose by 123 bps to 23.53%, according to data from the FMDQ Exchange platform.
In the early period in August, system liquidity was buoyant due to inflows from FAAC credits from the previous month and other government remittances. As the month progressed, liquidity moderated significantly following the retail Dutch Auction (rDAS) funding, worth about ₦1.20 trillion, AIICO Capital Limited said in a review note.
However, system liquidity was rejuvenated from SWAP maturities, early FAAC credits, and FGN bond coupon inflows, the firm said in its monthly report on the money market.
In the latter part of August, the financial system liquidity was stabilized on the back of the revised CBN’s policy regarding the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF). After the Central Bank of Nigeria (CBN) lifted suspension on standing lending facility window for banks to borrow, authorized dealers are now permitted to access liquidity at 31.75%.
Regulator also said authorized dealers are still permitted to access the Intraday Lending Facility window at no cost. “If not settled, ILF will be automatically converted to SLF and incur the 5% penalty which raised the short term borrowing cost of 36.75%”, AIICO Capital said.
Overall, the average opening system liquidity increased significantly from -₦490.42 billion in July to +₦365.28 billion in August. As a result, the average open repo rate declined by 207 bps month-over-month to 27.92% in August, while the overnight rate decreased by 202 bps month-over-month to 28.57%.
“Given the new CBN’s policy on SDF and SLF, we expect system liquidity to stay positive for most of September. However, since this could ease short-term treasuries, we expect the monetary policy committee meeting to provide context, especially in maintaining balance with the monetary policy rate”, AIICO Capital said. CBN Defends Naira with $39m in Forex Market
