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The Central Bank of Nigeria (CBN) reduced its liquidity withdrawal through Open Market Operations (OMO) in October, allowing more funds to remain within the banking system as repayments on maturing securities exceeded new issuances.
Data from the Financial Markets Dealers Association (FMDA) showed that the apex bank allotted N6.182 trillion in new OMO bills during the month, compared with N9.051 trillion in maturities. The difference resulted in a net repayment of approximately N2.87 trillion before other liquidity movements.
The development marked a reversal from September’s aggressive liquidity tightening, when the CBN sold N17.51 trillion in OMO securities against maturities of N10.89 trillion, withdrawing a net N6.62 trillion from the financial system.
Banking system liquidity rises by 56.75%
The moderation in OMO activity coincided with a significant increase in banking system liquidity, which rose by 56.75 per cent to N7.373 trillion in October from N4.703 trillion in September.
The FMDA’s October market report attributed the increase to the CBN’s reduced absorption of excess funds, alongside government disbursements and repayments on maturing securities. These inflows helped strengthen cash balances held by banks.
The shift became particularly apparent towards the end of October, when the CBN reduced its allotments at its final OMO auction of the month.
OMO instruments allow the central bank to manage liquidity by selling short-term securities to financial institutions, thereby absorbing excess funds from the banking system. When repayments on maturing securities exceed new sales, more funds can remain available to banks, depending on other liquidity movements.
November inflows could provide further liquidity support
The financial system is expected to receive additional inflows in November, with the FMDA projecting N13.79 trillion from maturing securities and government payments.
However, the projected inflows do not necessarily translate into a sustained increase in banking system liquidity. The CBN could absorb some of the funds through fresh OMO issuances, depending on its monetary and liquidity management objectives.
The amount of liquidity retained by banks will therefore depend largely on the volume of new securities offered and the central bank’s approach to managing excess funds.
The outlook highlights the importance of OMO auction decisions in determining how much liquidity remains available to financial institutions and how conditions evolve in the short-term money market.
Lower OMO sales could influence short-term yields
The reduction in liquidity mop-up also has implications for Nigeria’s fixed-income market. With more funds potentially available, banks and other investors could have greater capacity to invest in Treasury bills and other short-term instruments.
If the CBN maintains the selective allotments observed towards the end of October, excess liquidity could persist and place downward pressure on short-term money market yields.
However, the direction of yields will also depend on investor demand, the supply of government securities and subsequent liquidity management decisions by the central bank.
Overnight rates remain elevated despite higher liquidity
Despite the increase in banking system liquidity, the Nigeria Overnight Financing Rate remained unchanged at 20 per cent in October, while the overnight rate declined marginally by five basis points to 20.38 per cent.
The Monetary Policy Rate also remained at 23 per cent, following the CBN’s September decision to reduce it by 350 basis points.
The figures suggest that the increase in system liquidity had yet to translate into a significant easing of the reported overnight financing rate during the period.
The FMDA cautioned banks to maintain adequate liquidity buffers, noting that the CBN could continue deploying OMO auctions to manage excess funds in the financial system.
The direction of liquidity conditions in the coming weeks will therefore depend on the balance between maturing securities, government payments and fresh CBN issuances, with implications for bank funding conditions and short-term investment yields.
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