Short-term interest rates in Nigeria’s money market increased last week due to the Central Bank of Nigeria’s (CBN) large Open Market Operation (OMO) auction, which drained liquidity from the financial system.
At the start of the week, banks had sufficient cash to lend and invest, thanks to inflows from maturing fixed-income securities. However, as the CBN carried out a major OMO auction, absorbing a significant amount of cash, interest rates started to rise.
By the end of the week, liquidity in the banking system stood at N721.34 billion, an increase from N507.6 billion earlier in the period. Despite the surge in liquidity, large outflows due to government bond settlements and further OMO auctions put pressure on the market.
As a result, the interbank lending rates rose significantly. The open repo rate (a measure of short-term borrowing costs between banks) increased by 2.56 percentage points to 29.14%, while the overnight lending rate climbed by 2.57 percentage points to 29.57%.
Analysts expect that liquidity conditions will remain tight as the CBN continues to conduct treasury bill auctions to absorb excess cash from the system. Investors are also anticipating that the CBN may increase its benchmark interest rate at the next monetary policy meeting, which could make treasury bills more attractive for investment.
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