CBN absorbs N2.6trn liquidity glut to prevent sharp drop in market rates

The Central Bank of Nigeria (CBN) absorbed about N2.6 trillion in excess liquidity through the Standing Deposit Facility (SDF) as banking system liquidity expanded sharply during the week, limiting the potential decline in money market rates last week.

System liquidity rose by 36.0 per cent week-on-week (w/w) to N4.08 trillion, compared with N3.00 trillion in the previous week. According to data, the increase was driven mainly by N2.45 trillion in primary market repayments, which injected fresh funds into the banking system.

Banks also placed about N2.60 trillion with the CBN’s SDF, reflecting the significant volume of surplus cash available in the market.

The inflows lifted the opening net surplus balance above N5.00 trillion. However, the substantial SDF placements helped sterilise part of the excess liquidity and prevented the cash glut from triggering a sharper decline in short-term funding costs.

Despite the liquidity expansion, money market rates remained relatively stable. The Open Repo Rate held steady at 22.00 per cent, while the overnight rate declined by four basis points w/w to 22.10 per cent.

The Nigerian Interbank Offered Rate (NIBOR) curve also moderated across all tracked maturities. The overnight, one-month, three-month and six-month rates declined by three, seven, three and 13 basis points, respectively, to 22.18 per cent, 22.63 per cent, 23.18 per cent and 23.54 percent.

This modest decline in rates suggests that the CBN’s liquidity management operations continued to anchor market pricing, even as banks held substantial excess funds. Rather than allowing the liquidity injection to translate into significantly cheaper short-term funding, the central bank’s facilities helped keep rates aligned with its restrictive monetary policy stance.

Commenting on the development, analysts at investment houses, said that market liquidity is expected to remain robust in the near term.

“Looking ahead, we expect liquidity conditions to remain robust, supported by N900 billion in maturing OMO bills and anticipated FAAC disbursements for the July revenue allocation. In addition, the Debt Management Office (DMO) is scheduled to conduct a N700 billion Treasury bills auction next week.

We expect another round of strong investor participation and healthy subscription levels, supported by elevated market liquidity and continued demand for high-yielding sovereign instruments, while secondary market yields are likely to remain broadly stable”, Cowry Research said in an emailed note to its investors.

For their part, analysts at Cordros Research said, “Barring any mop up activities by the CBN, we expect system liquidity to remain robust, supported by inflows from OMO maturities (N1.58 trillion)”.