N4.66tn bank liquidity surplus eases funding pressure, lowers overnight rate

Nigeria's money market came under less funding pressure last week as excess liquidity in the banking system climbed to N4.66tn, pushing the overnight lending rate lower. The surplus rose from N3.6tn the previous week, supported by banks' placements at the Central Bank of Nigeria's Standing Deposit Facility and inflows from maturing securities.

Liquidity build-up drives rates down

According to Cowry Asset Limited, about N4.4tn of the surplus was placed at the SDF, while N2.3tn in primary market repayments further boosted liquidity available to financial institutions. The build-up helped ease short-term funding costs, with the overnight rate declining by 13 basis points to 22.13 per cent. The funding rate, however, remained unchanged at 22 per cent.

The softer money market conditions came despite continued liquidity management by the CBN through Open Market Operations, with OMO settlements absorbing some of the excess cash from the financial system. There was no reported activity at the Standing Lending Facility during the period, indicating that banks had little need to seek emergency short-term funding from the apex bank.

CBN's OMO sales and August tightening

The CBN stepped up liquidity absorption in August, taking N4.72tn out of the banking system through consecutive OMO auctions, compared with N2.19tn sterilised in July. It also settled N1.456tn in treasury bills on 12 August, adding to the movements in system liquidity during the month.

Despite those sizeable withdrawals, system liquidity recovered towards the end of August following inflows from bond coupon payments and maturing securities. The current easing follows a period of tighter conditions at the end of August. The overnight rate had risen to 23.80 per cent on 31 August, representing a 170-basis-point increase from 22.10 per cent at the end of July. The Open Repo rate similarly climbed to 23.25 per cent from 22 per cent.

Cowry Asset analysts said Nigerian Interbank Offered Rates moved higher across the curve, reflecting expectations that liquidity could tighten as the CBN continues its monetary operations. The competing forces of large system inflows and aggressive liquidity sterilisation are therefore expected to remain key drivers of money-market pricing.

September inflows and what it means

Market liquidity could remain relatively strong this month, with the Financial Market Dealers Association projecting total system inflows of N15.72tn in September. That represents a 16.1 per cent increase from the N13.54tn recorded in August. OMO maturities are expected to account for about 74 per cent of the projected September inflows, although the eventual liquidity position will depend heavily on how aggressively the CBN sterilises excess funds through OMO sales and other monetary operations.

For investors in money-market funds and other short-term fixed-income instruments, movements in interbank rates could influence the returns available on treasury bills, commercial papers, fixed deposits and other short-duration assets. With substantial OMO maturities expected in September, the direction of liquidity will largely depend on whether the CBN allows the resulting cash inflows to remain within the banking system or recycles a significant portion through fresh sterilisation operations.