More cash in economy pushes banks’ borrowing costs down after CBN rate cut

By Chinwendu Obienyi

Banks are now borrowing money more cheaply as cash circulating in the banking system rose sharply to N3.75 trillion, helping to ease pressure in the money market following a recent interest rate cut by the Central Bank of Nigeria (CBN).

A report by Cowry Research said the improvement in liquidity has strengthened the impact of the rate cut and made short-term borrowing less expensive for banks.

The increase in liquidity came after system cash rose from N2.26 trillion the previous week, largely supported by the maturity of N770 billion worth of Open Market Operations (OMO) bills. The repayments injected fresh funds into banks’ accounts, boosting their reserves and reducing the need for emergency borrowing.

“The market is responding positively to the liquidity inflow,” the report noted.

“Overnight and short-term borrowing rates have softened because there is now more cash available in the system,” analysts added.

According to the report, overnight (OVN) rates dropped to 22.17 per cent, while Open Repo (OPR) rates settled at 22.00 per cent. Both rates declined steadily during the week as excess cash moved around the financial system.

Market operators explained that when cash is scarce, banks rush to borrow from one another to meet regulatory requirements and payment obligations, which usually pushes interest rates higher. However, the latest cash injection reduced that pressure.

“The market is no longer as tight as it was before,” a market participant said.

“Banks are not scrambling for short-term funds, so borrowing costs are coming down.”

The recent monetary policy rate adjustment by the CBN also supported the downward trend in funding costs. Although the rate cut signals a gradual easing of monetary policy, analysts say liquidity levels usually have a stronger immediate impact on short-term market rates.

In addition, activity at the Standing Deposit Facility (SDF) window remained low during the period. This suggests banks preferred lending money to one another rather than parking excess funds with the central bank.

“Reduced use of the SDF window shows there is better confidence and balance in the market,” analysts said.

Lower borrowing costs could slightly improve bank profitability by reducing the expenses associated with managing daily cash shortages. However, financial analysts warned that interest rates are still high compared to historical levels.

The development could also influence money markets and government securities pricing. Softer short-term rates usually affect Treasury bill yields and other fixed-income investments, although market volatility remains a concern.

Traders warned that liquidity conditions in Nigeria can change quickly depending on government spending patterns, debt issuances, and future CBN liquidity management operations.

Going forward, analysts said the sustainability of lower funding costs will depend on whether liquidity remains high or is absorbed through new government securities or cash reserve adjustments.

For now, the combination of liquidity inflows and supportive monetary policy has given banks some breathing space as borrowing pressures ease and short-term funding conditions stabilize.