Due to the continued demand on the banking system’s liquidity, interbank rates in the money market have risen to around 32% each. The financial system’s financing level leads short-term benchmark interest rates to rise as the market allocates resources more efficiently.
The system liquidity started the week positive but dropped due to the OMO auction settlement of ₦459.60 billion. Because of the burden on finance, money market transactions were conducted at higher rates.
According to data from the FMDQ website, the Open Repo Rate (OPR) went from 18.11% to 31.25%, while the Overnight Rate (O/N) increased from 20.06% to 31.70% over the previous week.
The considerable increase in rates followed a new market dynamics that began with a series of outflows notwithstanding the absence of significant inflows from matured instruments to saturate the financial system and close the funding gap.
The OMO auction outflow of around N460 billion and the N200 billion debit for cash reserve ratio imposed on local deposit money banks outweighed OMO maturities of N15.90 billion.
This created significant liquidity strain in the financial system. According to Cordros Capital Limited, the average system liquidity ended at a net long position of N198.32 billion, up from a net short position of N622.65 billion the week before.
Analysts said they envisage that the overnight lending rate will likely remain elevated given that expected inflows from OMO maturities worth N32.50 billion may be insufficient in supporting the system amid a possible net issuance at the Nigerian Treasury bills auction in the new week.
In August, liquidity constraints weighed heavily on rates by the end of the month, with system liquidity closing at N466.9 billion. This was impacted by primary market sales of N51.9 billion.
As a result, money market rates such as the overnight (OVN) and open repo rate (OPR) contracted sharply by 549 basis points (bps) and 513 bps, respectively, from their levels at the end of July.
However, liquidity in the financial system improved due to a significant FAAC inflow exceeding N600 billion last month. This led to a notable contraction in the overnight Nigerian interbank offered rate by 5.71 percentage points, bringing it down to 20.25%.
