Overnight rate drops 20% on expectation of liquidity squeeze

The overnight lending rate on Thursday dropped to 20 per cent on expectation that a cash squeeze will ease after money market rates more than doubled previous session.

It is, however, worthy of notes that the Central Bank of a Nigeria (CBN) has kept liquidity tight to support the currency, leaving its benchmark interest rate on hold at 14 per cent this year.

The apex bank, also aims to keep rates high to attract foreign inflows into its bond market to boost dollar liquidity.

For instance, the overnight rate closed at 44 per cent on Wednesday after banking system liquidity hit a debit of 265 billion naira.

But tight liquidity continued on Thursday with the market in debit of 243 billion naira although the central bank repaid some treasury securities.

“The market is a bit tight because of FX purchases which mopped up (naira) liquidity,” one trader said.

Traders said money market rates dropped on Thursday as lenders accessed the central bank window for naira at 16 per cent.

The central bank is selling $100 million weekly to meet wholesale currency demand and also a separate amount twice weekly for retail needs to keep its multiple exchange rate system stable.

Consequently, the liquidity mop up by the apex bank through Open Market Operations (OMO) and Treasury bill auctions, the Nigerian currency, Naira, in circulation has declined to N1.78 trillion in September of 2017.

The OMO sales last Friday alone, forced the Open Buy Back (OBB) and Overnight (OVN) rates to soar, hence, most banks resulted to borrowing due to lack of liquidity to meet their allocations.

However, in September, the apex bank sales OMO bills worth N599.47 billion as against N960 billion offered in August 2017.

The N1.78 trillion currency in circulation is the second lowest, after N1.76 trillion in July and N1.87 trillion in June as the apex bank continued to mop up excess liquidity in a bid to reduce money supply in the nation’s economy.

According to the CBN, Naira in circulation was estimated at N1.86 trillion in August 2017, 5.6 per cent increase over N1.76 trillion in July.

The currency in circulation, which is the physical money used for transactions between consumers and businesses, had opened 2017 at N1.99 trillion and closed in February at N1.97 trillion.

CBN on its official website disclosed that N1.98 trillion and N1.97 trillion was in circulation in March and April respectively, as March was the highest Naira circulation the economy.

The data on CBN website revealed that currency in circulation moved to N1.89 trillion in May, representing the highest naira in circulation reported in 2016.

Meanwhile, analysts at Cordros Capital said, “overnight money market rate expanded by 583 basis points to 14.25 per cent, compared to last month close of 8.42 per cent, following substantial outflows via OMO bills worth N599.47 billion in September as against N960 billion offered in August, while  Treasury Bill auctions and Bond auctions worth N75 billion and N108.78 billion respectively.

“Notwithstanding significant inflows from matured OMO bills worth N559.47 billion and budgetary allocations to state and local governments worth N228.7 billion, system liquidity closed in the deficit (N150.35 billion), compared to N250.41 billion surplus it closed in the previous month.

“During the month under review, the overnight lending rate ranged between 9.33 per cent and 38.00per cent, compared to the previous month, wherein rates hovered between 5.50 per cent and 107.75per cent.”

The September report by Cordros capital explained that, “Notwithstanding the expected improvement in system liquidity from maturing OMO bills worth N514.37 billion and budgetary disbursement to state and local governments, we expect the overnight rate to remain elevated, with more money likely to leave the system via OMO, bond and T-bill auctions.”