Interbank Overnight Rate Rises by 6%

Aluminum coins to be minted into 1 Japanese yen coins are held for a photograph at the Akao Aluminum Co. plant in Tokyo. Tomohiro OhsumiAluminum coins to be minted into 1 Japanese yen coins are held for a photograph at the Akao Aluminum Co. plant in Tokyo. Tomohiro Ohsumi

The scramble for funds by commercial banks forced the interbank overnight rate to jump by six per cent to 13.33 per cent on Thursday, from 7.33 per cent the previous day.

Similarly, the open buy-back and overnight rate also rose to 12.75 per cent, from 6.75 per cent.

This came barely 48 hours after the Central Bank of Nigeria’s Monetary Policy Committee increased the Cash Reserve Ratio for commercial banks to 22.5 per cent from 20 per cent, and the benchmark interest rate from 11 per cent to 12 per cent, as part of measures to curb rising inflation.

Similarly, customers’ deposits in the vaults of banks fell significantly on Thursday after the CBN withdrew about N400bn from the banking system to meet a new CRR on deposits, it was learnt.

The significant drop in the Deposit Money Banks’ deposits forced a number of them to the interbank market to borrow funds to cover their positions ahead of the Easter break.

Data posted on the FMDQ OTC website showed that the interbank overnight rate rose to 13.33 per cent from 7.33 per cent on Wednesday.

“We have had major fund placers in the market quoting between 20 and 25 per cent for overnight placement, while takers are quoting between seven and 10 per cent,” one dealer told Reuters, adding that no deals had yet been done on the rates being quoted.

Traders said there was additional cash outflow for premium payments to the Nigerian Deposit Insurance Corporation, which further put pressure on liquidity in the system and forced lending rates up.

On Wednesday, yields on Nigeria’s benchmark 20-year bond rose by 55 basis points to 12.7 per cent after the CBN unexpectedly tightened monetary policy.

The total commercial lenders’ credit balance with the central bank stood at N320.9bn on Thursday, up from N217bn last week.

However, traders said the level of cash in the banks’ vaults would have dropped significantly due to cash withdrawals to meet the new CRR and premium payments on customer deposits.

Commenting on the MPC decision, analysts at Afrinvest said, “The move to hike the CRR by 2.5 per cent to 22.5 per cent was in a bid to curb speculative activities in the foreign exchange market.

“We estimate this to quarantine the sum of N409.7bn from the system. However, we are of the view that this reflects the notion that previous decision to reduce the CRR by five per cent was largely premature given that the operating environment remains unattractive for loan growth.

“We do not expect a reversal in this tightening stance in the medium term as committee members would remain wary of the liquidity impulse from expansionary budget. In the interim, we expect to see a 100bps-200bps increase in yields in the fixed income market, while the cost of funds may likely rise for Tier-2 banks as the interbank market adjusts to the tightening of liquidity. However, assets repricing of fixed income securities and other risk assets will likely compensate for this.”

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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