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By Chinwendu Obienyi
Banks in the country pulled back about N1.76 trillion from the Central Bank of Nigeria (CBN)’s deposit window in April, signaling a moderation in excess liquidity conditions as investors begin positioning ahead of the country’s emerging election cycle and persistent inflation concerns.
Data reviewed shows that Nigerian banks reduced the amount of money they placed with the Central Bank of Nigeria through its Standing Deposit Facility in April. On average, they kept about N4.62 trillion daily, down from N6.38 trillion in March, indicating a sharp drop in the funds parked with the apex bank within the month.
The drop contributed to a broader moderation in system liquidity, with the banking sector closing the month under review in an average net long position of N4.85 trillion, down from N6.50 trillion in the previous month.
Also, the reduction in surplus liquidity also pushed short-term funding costs slightly higher. Overnight lending rates climbed by 24 basis points to 22.3 per cent during the month as banks adjusted to tighter liquidity conditions.
Commenting on the development, economic analysts explained that the shift reflects a combination of changing market expectations, rising inflationary pressures, and early positioning by investors ahead of heightened political activity expected to shape market sentiment over the coming quarters.
Daily Sun gathered that despite the moderation in liquidity, financial markets may soon receive fresh support from large inflows expected in May. According to analysts at Cordros Research, about N6.59 trillion in Open Market Operations (OMO) maturities and an additional N327.21 billion in bond coupon payments are projected to inject nearly N6.92 trillion into the financial system this month.
The anticipated inflows are expected to increase liquidity across the banking sector and could place downward pressure on fixed-income yields in the near term as investors seek outlets for excess cash.
Still, analysts warn that elevated inflation and uncertainty surrounding monetary policy could limit the extent of any sustained decline in yields.
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Already, inflation rate is projected to rise further to 15.54 per cent year-on-year (y/y) in April from 15.38 per cent in March, driven largely by higher energy costs and lingering price pressures across the economy. Persistently high inflation has continued to complicate the policy outlook for the central bank, which has maintained a tight monetary stance in recent months.
With interest rates expected to remain elevated for much of the year, analysts say room for a significant rally in the fixed-income market remains constrained despite improving liquidity conditions.
Analyst at Cowry Research, Charles Abuede, said that the liquidity backdrop remains supportive, but inflation risks and government borrowing needs are likely to keep investors.
“Government borrowing requirements are also expected to influence market direction in the coming months as authorities continue to rely on domestic debt markets to finance fiscal obligations”, he said.
According to him, while stronger liquidity conditions could support moderate yield compression across treasury bills and bonds, investor appetite may remain sensitive to external shocks, geopolitical developments, and policy uncertainty ahead of the next political cycle.
Even so, the expected liquidity injections into the market are likely to cushion any sharp upward movement in yields, ensuring that selloffs remain relatively shallow in the near term.
For investors, the coming months may present a delicate balance between liquidity-driven opportunities in fixed income markets and the risks posed by inflation, monetary tightening, and growing political uncertainty.
