Nigeria’s money market experienced less funding pressure last week as excess liquidity in the banking system rose to N4.66tn, pushing the overnight lending rate lower.
System liquidity increased from N3.6tn the previous week, supported largely by banks’ placements at the Central Bank of Nigeria’s Standing Deposit Facility and inflows from maturing securities.
According to Cowry Asset Limited, about N4.4tn of the surplus was placed at the SDF, while N2.3tn in primary market repayments further boosted liquidity available to financial institutions.
The liquidity build-up helped ease short-term funding costs, with the overnight rate declining by 13 basis points to 22.13 per cent. The funding rate, however, remained unchanged at 22 per cent.
The softer money market conditions emerged despite continued liquidity management by the CBN through Open Market Operations, with OMO settlements absorbing some of the excess cash from the financial system.
There was no reported activity at the Standing Lending Facility during the period, an indication that banks had little need to seek emergency short-term funding from the apex bank.
Market liquidity could remain relatively strong this month, with the Financial Market Dealers Association projecting total system inflows of N15.72tn in September a 16.1 per cent increase from the N13.54tn recorded in August.
OMO maturities are expected to account for about 74 per cent of the projected September inflows, although the eventual liquidity position will depend heavily on how aggressively the CBN sterilises excess funds through OMO sales and other monetary operations.
The CBN stepped up liquidity absorption in August, withdrawing N4.72tn from the banking system through consecutive OMO auctions, compared with N2.19tn sterilised in July. It also settled N1.456tn in treasury bills on August 12, further influencing system liquidity movements during the month.
Despite the sizeable liquidity withdrawals, system liquidity recovered towards the end of August, buoyed by inflows from bond coupon payments and maturing securities.
The current easing in overnight funding costs follows a period of tighter conditions at the end of August. The overnight rate had climbed to 23.80 per cent on August 31 a 170-basis-point increase from 22.10 per cent at the end of July. The Open Repo rate similarly rose to 23.25 per cent from 22 per cent.
Cowry Asset analysts said Nigerian Interbank Offered Rates moved higher across the curve, reflecting expectations that liquidity could tighten further as the CBN continues its monetary operations.
The competing forces of large system inflows and aggressive liquidity sterilisation are expected to remain key drivers of money-market pricing in the weeks ahead.
For investors in money-market funds and other short-term fixed-income instruments, movements in interbank rates could influence returns on treasury bills, commercial papers, fixed deposits and other short-duration assets.
With substantial OMO maturities expected in September, the direction of liquidity will largely hinge on whether the CBN allows the resulting cash inflows to remain within the banking system or recycles a significant portion through fresh sterilisation operations.
