Money Market Rate Rises Over Liquidity Pressure

Despite inflows from matured OMO bills, the money market’s short-term benchmark interest rates increased as the banking system’s liquidity level remained low.

Due to the apex bank’s ongoing liquidity mop-up, the market’s funding levels are stressed by the lack of significant inflows from maturing securities. Rates have increased because of the negative liquidity level, which has caused the market to reallocate resources to other purposes.

Banks that need liquidity search for money from peers and the apex bank borrowing window, among other sources. Other commercial banks moved to the Central Bank (CBN) in order to obtain liquidity from the apex bank’s standing lending facility, even though some Treasury bill asset dumping was observed.

Higher funding rates were also supported by cash-rich banks that started to demand higher rates to part with their free funds. Data from the FMDQ showed that funding rates crossed the 32% benchmark this week. Rates have steadied below the level in recent weeks, despite multiple primary market auctions.

In their separate market updates, investment firms said system liquidity remained in negative territory on Tuesday. Hence, the open repo rate (OPR) increased by 35 bps to 32.02%, while the overnight lending rate expanded by 27 bps to 32.55%.

With about N5.4 trillion taken out of the CBN lending facility last week, liquidity stress has again driven banks to start borrowing at a higher rate in the new week. The market recorded a N32.20 billion inflow from OMO maturities. Analysts said the financial system faced a liquidity shortage due to huge amounts raised from selling government borrowing instruments to investors.

In June, the money market was relatively liquid, largely due to the absence of significant outflows. Initially, the first half of the month showed a mixed trend, with most of the deficit balances driven by OMO auction debits worth ₦1.50 trillion, particularly the first two auctions out of the four conducted during the month, AIICO Capital Limited told investors in a report.

However, FAAC inflows and bond coupons worth about N216 billion boosted the liquidity balance around mid-month. Afterward, system liquidity stayed positive given the small size of the other OMO auctions and some additional inflows from Remita, NG CARES, and NDF maturity.

In the month, the average open repo rate contracted by 275 basis points to 26.85% in June, while the overnight rate fell by 288 basis points month-on-month to 27.49%, AIICO Capital Limited said in a note.

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