Money market rates, which are essentially short-term interest rates for borrowing money, fell sharply last week because the banking system received a lot of cash. This extra money helped ease the liquidity shortage (when there’s not enough money available in the system), according to reports from investment firms.
The drop in rates was driven by three key sources of funds:
- FAAC payments – These are monthly allocations shared among the federal, state, and local governments.
- Remita inflows – This refers to funds received through a government payment platform.
- FGN bond coupon payments – These are interest payments made to investors holding federal government bonds.
What Happened During the Week
According to analysts at AIICO Capital Limited, the amount of money circulating in the banking system changed a lot throughout the week. At first, the cash situation improved a little, but there still wasn’t enough money, which kept borrowing costs high.
By midweek, things got better as more money entered the system, which caused short-term borrowing rates (like the overnight policy rate and overnight lending rate) to drop. However, a temporary setback came when the system lost money due to treasury bill settlements. Later in the week, more Remita inflows helped ease the pressure again.
Key Figures and Market Updates
- By the end of the week, the overnight lending rate had dropped significantly to 27.50%, down from earlier highs of around 30%.
- On Friday, the banking system had a cash surplus of ₦211.80 billion, a big turnaround from the ₦307.56 billion deficit recorded at the start of the week.
- Inflows from bond coupon payments added ₦414.98 billion, but some of that was offset by treasury bill settlements and foreign exchange transactions.
What’s Next?
Analysts expect the market to remain stable in the coming days because of additional cash injections from two sources:
- ₦335 billion in OMO maturities – These are repayments for earlier investments in central bank bills.
- Upcoming FAAC payments – More funds will be distributed to government accounts.
However, some pressures could arise. For example, TrustBanc Financial Group noted that a bond auction happening on Monday might temporarily tighten cash availability, which could keep short-term interest rates high.
Cordros Capital Limited added that last week’s average cash shortage in the banking system was significantly lower, suggesting conditions are improving. In summary, more cash entering the system led to lower borrowing costs, and the market is expected to remain relatively stable with more inflows on the horizon.
