More pressure on liquidity as CBN mop-ups N422bn

Funds scarcity may continue this week following the Central Bank of Nigeria decision to mop up N422 billion and an expected marginal inflow of N14.1 billion from maturing OMO TBs.

Last week the market experienced inflow of N413 billion from matured treasury bills (TBs). The effect of the inflow on cost of funds was however short lived as the CBN stepped up its liquid mop up activities by issuing special Open Market Operations (OMO) TBs as well as N130 billion worth of Primary Market TBs.

According to the Financial Market Dealers Quote (FMDQ), interest rate on Collateralized lending (Open Buy Back, OBB) rose by 122 basis points to 25.83 per cent on Friday, from 13.67 per cent the previous week. Similarly, interest rate on overnight lending rose by 118 bpts to 26 per cent from 14.25 per cent the previous week.

Reacting to the trend, analysts at Lagos based Cowry Asset Management Plc, said as a result of the limited expected inflows at the interbank market, stakeholders should expect some pressure on the financial system liquidity with resultant increase in rates.

Meanwhile, analysts at Ecobank Nigeria said that the downward trend in the interest rate on 364-Days TBs witnessed in the second and third quarters  will persist in the fourth quarter.

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In a review of movement in interest rates on TBs, Ecobank Research analyst, Mr. Kunle Ezun noted that interest rate on 364-Days TBs declined by 325bpts to 15.73 per cent at the end of the third quarter from 18.98 per cent at the beginning of the second quarter, adding that this may further dropped to 14 per cent to align with the Monetary Policy Rate (MPR) which is presently at 14 per cent.

Ezun said: “Interest rate on 364-day treasury bills may have triggered a conversation on interest rate direction for securities trading and pricing in Nigeria. “The interest rate performance on 364-day treasury bills rate is a reflection of recent market development relating to Federal government decision to sell dollar-backed treasury bills and a possible $5.5 billion Eurobond issuance in November 2017.

Interest rate on 364-day treasury bills is on a downward trend, but how low can it go? The CBN has kept policy interest rate high at 14.0 per cent to anchor inflation and possibly ensure positive real return on NGN denominated government securities in a high inflationary environment.

However, if the CBN decides to tweak its monetary policy stance to support economic growth, the interest rate might drop further down, Ezun said.