Money Market Rates Surge as OMO, CRR Debits Drag Liquidity
The interbank rates climbed to about 32% apiece in the money market due to sustained strain on the financial system liquidity. The funding level in the financial system causes short term benchmark interest rates to increase as the market continues to allocate resources to better use.
The system liquidity started the week positive but decreased during the week, following the OMO auction settlement worth ₦459.60 billion. Due to a strain on funding level, transaction at the money market environment were conducted at higher rates.
Data from the FMDQ platform showed that the Open Repo Rate (OPR) increased from 18.11% to 31.25%, while the Overnight Rate (O/N) increased from 20.06% to 31.70%, compared to the previous week.
The significant increase in rates followed a new market dynamics initiated on the back of series of outflows despite absence of significant inflows from matured instrument to saturate the financial system and covered up gap in funding level.
The OMO auction outflow of about N460 billion and N200 billion debit for cash reserve ratio slammed on local deposit money banks dwarfed OMO maturities totaling N15.90 billion.
This caused substantial liquidity pressure in the financial system. Consequently, the average system liquidity settled at a net long position of N198.32 billion as against a net short position of N622.65 billion in the previous week, according to Cordros Capital Limited.
Analysts said they envisage that the overnight lending rate will likely remain elevated given that expected inflows from OMO maturities worth N32.50 billion may be insufficient in supporting the system amid a possible net issuance at the Nigerian Treasury bills auction in the new week.
In August, liquidity constraints weighed heavily on rates by the end of the month, with system liquidity closing at N466.9 billion. This was impacted by primary market sales of N51.9 billion.
As a result, money market rates such as the overnight (OVN) and open repo rate (OPR) contracted sharply by 549 basis points (bps) and 513 bps, respectively, from their levels at the end of July.
However, liquidity in the financial system improved due to a significant FAAC inflow exceeding N600 billion last month. This led to a notable contraction in the overnight Nigerian interbank offered rate by 5.71 percentage points, bringing it down to 20.25%. #Money Market Rates Surge as OMO, CRR Debits Drag Liquidity FBN Holdings Divests Interest in Merchant Business to ‘Consortium’
