Money Market Rates Spike Over Liquidity Pressure
The short-term benchmark interest rates climbed in the money market as the liquidity level in the financial system remained depressed despite inflows from matured OMO bills.
The persistent liquidity mop-up by the apex bank has strained funding levels in the market in the absence of strong inflows from maturing securities. The liquidity level has been negative, causing rates to increase as the market allocates resources to alternative uses.
Banks with liquidity demand scout for funding from sources including peers and available facility from the apex bank borrowing window. While some Treasury bill asset dumping was noticed, other commercial banks switched to the Central Bank (CBN) to access liquidity from the apex bank’s standing lending facility.
Higher funding rates were also supported by cash-rich banks that started to demand higher rates to part with their free funds. Data from the FMDQ showed that funding rates crossed the 32% benchmark this week. Rates have steadied below the level in recent weeks, despite multiple primary market auctions.
In their separate market updates, investment firms said system liquidity remained in the negative territory on Tuesday. Hence, the open repo rate (OPR) increased by 35 bps to 32.02%, while the overnight lending rate expanded by 27 bps to 32.55%.
With about N5.4 trillion taken out of the CBN lending facility last week, liquidity stress has again driven banks to start borrowing at a higher rate in the new week. The market recorded a N32.20 billion inflow from OMO maturities. Analysts said the financial system faced a liquidity shortage due to huge amounts raised from selling government borrowing instruments to investors.
In June, the money market was relatively liquid, majorly due to the absence of significant outflows. Initially, the first half of the month showed a mixed trend, with most of the deficit balances driven by OMO auction debits worth ₦1.50 trillion, particularly the first two auctions out of the four conducted during the month, AIICO Capital Limited told investors in a report.
However, FAAC inflows and Bond coupons worth about N216 billion boosted the liquidity balance around mid-month. Afterward, system liquidity stayed positive given the small size of the other OMO auctions and some additional inflows from Remita, NG CARES, and NDF maturity.
In the month, the average open repo rate contracted by 275bps to 26.85% in June, while the overnight rate fell by 288bps month on month to 27.49%, AIICO Capital Limited said in a note.
