The deposits of banks with the Central Bank of Nigeria reached a weekly peak of N3.42 trillion at the close of the previous week.
The Central Bank of Nigeria’s (CBN) announcement of the operationalization of the Standing Deposit Facility asymmetric corridor to +500/-100bps from +100/-300bps around the monetary policy rate within the week resulted in a surge in bank deposits.
The Standing Deposit Facility (SDF) rate, which applies to deposits made by banks at the Central Bank of Nigeria (CBN), was raised to 25.75 percent. Concurrently, the Standing Lending Facility (SLF) rate was adjusted to 31.75 percent.
During the previous MPC meeting of the CBN, the committee members had voted to raise the MPR by 50 basis points to 26.75 per cent from 26.25 per cent, adjust the asymmetric corridor around the MPR to +500/-100 from +100/- 300 basis points while retaining the cash reserve ratio of deposit money banks at 45 per cent and merchant banks at 14 per cent and retaining the liquidity ratio at 30 per cent.
Experts believe that the recent policy adjustments are intended to discourage banks from hoarding excess liquidity at the Central Bank of Nigeria and encourage them to lend more. These changes are expected to influence the banks’ cost of funds, which could, in turn, affect the interest rates they charge on loans and offer on deposits.
At the end of the previous week, bank deposits with the CBN reached a new high for August, totaling N3.42 trillion. This figure represents a significant increase compared to the combined deposits of the three preceding weeks, which amounted to N3.57 trillion.
The next day following the announcement, banks had deposited about N1.09tn.
A CBN circular signed by the Director of the Financial Markets Department, Omolara Duke, stated the Standing Deposit Facility rate had been increased to 25.75 per cent on deposits up to N3bn, while deposits exceeding the amount will attract a lower rate of 19 per cent for Commercial and merchant banks, while payment service banks will receive 25.75 per cent on deposits up to N1.50bn with amounts above this threshold earning 19 per cent.
The Central Bank of Nigeria’s (CBN) recent policy adjustments are expected to have a significant impact on the banking sector. By raising both the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) rates, the central bank aims to reduce excess liquidity, which is often a precursor to inflation.
Recall that at the conclusion of the February Monetary Policy Committee (MPC) meetings, committee members attributed the escalating inflation rate in the country to excessive cash in circulation. The CBN’s latest data revealed a record-breaking surge in currency in circulation to N4.05 trillion in July 2024, marking an all-time high.
The CBN also provides a Standing Lending Facility window, a short-term lending window for banks and merchant banks, to access liquidity to run their day-to-day business operations. At the end of August, banks had borrowed over N3.02tn.
Meanwhile, Afrinvest in in its monthly market report projected that the operationalisation of the SDF asymmetric corridor reinforces rally expectations.
“Notably, the CBN has cut the interest rate on excess deposits by commercial and merchant banks above an initial N3.0bn limit to 19.0 per cent, down from 25.75 per cent. This effectively lowers the theoretical floor for T-bills, assuming other factors remain constant.
“Lastly, we estimate N1.2tn inflows from maturing T-bills (N622.7bn) and FGN bond coupons (N563bn) to improve liquidity dynamics,” the firm asserted.
This article was written by Tamaraebiju Jide, a student at Elizade University
