Money market rates rose sharply as financial system pressures pushed banks to pitch their tents at the apex bank discount window to borrow cash to bolster their separate liquidity positions.
Deposit money banks (DMBs) returned to the Central Bank of Nigeria’s (CBN) standing lending facility to borrow around N420 billion to meet their liquidity needs as funding levels in the financial sector decreased.
The current action was a reverse of what the market saw earlier in August, when cash-rich local lenders increased their participation in the standing deposit facility to sterilize surplus liquidity.
Money market rates had fallen below 30% due to the financial system’s robust liquidity, which was backed by FAAC credit, coupon payments, and other inflows from maturing debt instruments.
In the just concluded week, the overnight lending rate expanded significantly by 791 basis points week on week to 34.0%, analysts at Cordros Capital Limited said in note, citing data from the FMDQ platform.
The rate declined following the debits for the CBN’s FX Retail Dutch Auction worth N1.31 trillion on Thursday. The apex bank had sold $826 million to authorised dealer bank on Wednesday to boost liquidity in the foreign exchange market.
Nonetheless, average system liquidity settled at a net long position of N10.61 billion versus net short position of N132.33 billion in the previous week reflecting DMBs’ activities at the CBN SLF window.
At the CBN window, banks take out N419.87 billion in the week, according to analysts note.
“We anticipate sustained dearth in system liquidity this week, as we believe that the sole inflow from OMO maturities worth N20.50 billion would be insufficient to support financial system liquidity. Thus, we expect the overnight rate will likely maintain its uptrend”, Cordros Capital Limited projected.
System liquidity remained positive for most of the week but turned negative by the end of the week. As a result, the Open Repo Rate (OPR) and the Overnight Rate (O/N) increased by 778 bps and 791 bps to 33.39% and 33.97% respectively, compared to the previous week.
In July, the system liquidity was relatively tight with banks queuing up at the CBN discount window, net borrowing about N648.6 billion as against net deposit of N69.6 billion in June 2024.
In the money market, the Nigerian interbank offered rate surged by 500 basis points to close at 36.71% as banks with liquidity sought higher rates on Friday, signalling tightening liquidity conditions.
