Interest rate cut floods banks with excess cash, N7trn returned to CBN

…N1trn bills attract N6.1trn

Banks and other financial institutions deposited more than N7 trillion with the Central Bank of Nigeria (CBN) last week as excess liquidity surged following the Monetary Policy Committee’s (MPC) 350-basis-point cut in the benchmark interest rate.

The development highlights the speed at which the rate cut is filtering through the money market, pushing short-term yields lower and leaving banks with more cash than they can profitably deploy.

The Standing Deposit Facility (SDF) allows eligible financial institutions to place excess funds overnight with the CBN at a predetermined rate.

According to data gathered by Daily Sun, net system liquidity rose sharply to N5.98 trillion last week from N2.86 trillion the previous week, supported by more than N7 trillion in SDF placements and about N2.3 trillion in Open Market Operation (OMO) repayments.

The liquidity surge came days after the MPC cut the Monetary Policy Rate (MPR) by 350 basis points from 26.5 per cent to 23 per cent at its September 21-22 meeting.

The policy shift triggered a broad repricing across the money and fixed-income markets, with short-term interest rates falling significantly.

The overnight rate declined by 147 basis points week-on-week to 20.77 per cent, while the funding rate dropped by 160 basis points to 20.40 per cent.

Rates across the Nigerian Interbank Offered Rate (NIBOR) curve also fell, with the overnight, one-month, three-month and six-month rates declining by 205, 171, 135 and 118 basis points respectively.

Treasury bill yields also dropped as investors adjusted to the lower interest-rate environment. The average Nigerian Treasury Bill (NTB) yield fell by 90 basis points to 17.89 per cent.

Despite the fall in yields, demand for government securities remained strong.

At the September 23 NTB auction, the Debt Management Office (DMO) offered N600 billion across the 91-day, 182-day and 364-day bills but received about N4.2 trillion in subscriptions, representing roughly seven times the amount offered.

The DMO eventually allotted N497 billion, while stop rates fell to 15.50 per cent for the 91-day bill, 15.80 per cent for the 182-day bill and 15.89 per cent for the 364-day instrument.

The CBN’s OMO auction also recorded heavy demand. The apex bank offered N1 trillion across 68-day, 152-day and 180-day bills but received N6.1 trillion in bids, representing 610 per cent of the amount offered.

The CBN allotted N2.3 trillion, with no allotment for the 68-day paper. The 152-day and 180-day bills cleared at 17.29 per cent and 16.99 per cent respectively.

Analysts said the strong demand for government securities, despite falling yields, reflected investors’ efforts to lock in available returns before further transmission of the rate cut pushes yields lower.

Cowry Research said the combination of large OMO maturities, bond coupon payments and the MPC’s rate cut had left banks with substantial excess liquidity.

“We expect the overnight and funding rates to trade closer to the lower end of the repriced corridor, supported by abundant system liquidity and the transmission of the lower policy rate into short-term funding markets,” it said.

The liquidity pressure could intensify this week, with about N2.43 trillion in OMO maturities and N164 billion in bond coupons expected to enter the financial system.

Cowry Research said the additional liquidity could put further downward pressure on fixed-income yields, although the pace could slow if the CBN introduces measures to mop up excess cash.

Cordros Research also expects system liquidity to remain high, with banks likely to continue placing surplus funds in the SDF window.

The research firm noted that the SDF rate of 20 per cent remained relatively attractive compared with prevailing short-term market yields.

It added that about N1.09 trillion in OMO maturities was expected in the coming week, although fresh OMO sales could partly offset the liquidity injection.

For now, the MPC’s rate cut has quickly reshaped the money market, leaving banks with abundant liquidity while short-term yields continue to fall.