Nigeria: Interbank Rates Rise as Funding Pressures Weigh on Liquidity

Interbank rates surged last week as funding pressures tightened liquidity across the financial system. Despite inflows from signature bonuses, Remita payments, and government contractor disbursements, these measures fell short of easing interbank rate volatility.

Short-term benchmark interest rates climbed due to liquidity constraints, although analysts anticipate a decline in rates this week, supported by improved liquidity levels and reduced funding pressure in the money market.

According to a report by TrustBanc Financial Group, system liquidity ended the week on a positive note with a balance of N871.20 billion, marking a 147% increase from the previous day’s surplus of N353.26 billion. Midweek, however, liquidity turned negative, recording a N166 billion shortfall following Open Market Operations (OMO) auction debits by the Central Bank of Nigeria (CBN).

The money market opened the week with robust liquidity at N846.78 billion, primarily fueled by inflows of nearly N600 billion from contractor payments. AIICO Capital Limited noted that significant inflows via Remita early in the week helped lower interbank rates. The Overnight Policy Rate (OPR) dropped to 26.50%, while the Overnight Rate (O/N) fell to 27.14%.

However, the CBN’s OMO auction on Tuesday, which saw the sale of N500 billion worth of bills, temporarily pushed the system into a liquidity deficit. This tightening was exacerbated by net debits arising from cash reserve ratio (CRR) maintenance requirements. As a result, interbank rates spiked to 28%-30% midweek, according to AIICO Capital Limited.

Later in the week, liquidity rebounded strongly, supported by inflows from signature bonuses and Remita credits. TrustBanc highlighted that inflows from Deposit Money Banks (DMBs) into the Standing Deposit Facility (SDF) surged by 76%, contributing to the robust liquidity position.

By the week’s end, interbank funding rates stabilized around 27%, with the OPR and O/N closing at 26.75% and 27.25%, respectively. TrustBanc projects that, barring significant outflows, the current liquidity balance will likely remain stable, keeping funding rates at similar levels in the coming week.

Despite the fluctuations, the open repo rate recorded a slight increase of 25 basis points, settling at 26.75%. Weekly rates rose by 14 basis points to 27.25%. Cordros Capital Limited’s report indicated that average liquidity closed at a net long position of N471.76 billion, compared to a net short position of N402.18 billion the prior week.

These liquidity trends and interbank rate movements underscore the dynamic interplay of inflows, funding pressures, and monetary policy operations within Nigeria’s financial system.