Short-Term Rates Decline in Absence of Liquidity Pressure
The short-term benchmark interest rates fell as the money market witnessed a remarkable turnaround, with strong liquidity inflows reshaping the funding landscape last week.
Interbank rates were above 32% at the beginning of the week due to tight funding conditions in the banking system, fueling a modest uptick in interbank rates. Many deposit money banks accessed funds via the Central Bank of Nigeria (CBN) standing lending facility.
To meet their daily funding demands, banks’ weekly average borrowing increased to N360.19 billion from N294.60 billion in the comparable period, according to Cordros Capital Limited.
The Apex Bank activities also triggered liquidity stress. The CBN conducted an open market operation where a huge amount was taken out of the system in addition to payment for FX sold to banks.
The liquidity condition improved midweek due to hefty inflows from OMO and Treasury bill maturities. This liquidity buffer not only reversed the earlier tight conditions but also triggered a broad-based decline in interbank rates across funding windows.
The Nigerian Interbank borrowing rate nosedived 379 basis points (bps) week on week to settle at 28.75% on Friday, even amid heightened banking activity at the CBN’s Standing Deposit Facility window. Hence, the open repo rate dipped 320 bps to 28.90%, while the overnight funding rate retreated 280 bps to 29.15%.
This reversed the elevated rate of above 32% at the beginning of the week as the financial system recorded substantial inflows totaling N854 billion from OMO maturity. Additional inflows from FGN bond coupon credit totalling N392.74 billion provided additional support. Interbank rates were lower to 26.50% and 27.00%, respectively, midweek.
However, the CBN’s N600 billion OMO issuance absorbed excess liquidity, temporarily pushing funding costs back toward 32.5%. Total subscriptions reached N1,015.19 billion, with N897.19 billion allotted.
On Friday, system liquidity settled at N287.76 billion credit, supporting relatively lower funding costs. Overall, the OPR declined 3.20% to 28.90%, while the overnight lending rate dropped 3.25% to 29.15%.
Market analysts at AIICO Capital expect inflows, including N800 billion from SRA, N758 billion in OMO maturities, and N113.62 billion from FGN bond coupons, to boost interbank liquidity and push rates toward 26.5%, unless major funding pressures emerge.
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