Nigeria Banking Liquidity Rises to N7.45tn as Interest Rates Ease After CBN Reset

Liquidity in Nigeria’s banking system increased to N7.45 trillion as short-term borrowing costs declined following the Central Bank of Nigeria’s decision to reset its benchmark interest rate to 23 percent.

System liquidity rose 7.92 percent from N6.91 trillion, extending its expansion for a fourth consecutive trading session as banks accumulated excess cash amid substantial inflows into the financial system.

The increase represents a sharp turnaround from the liquidity conditions recorded earlier in September when aggressive Open Market Operations by the CBN repeatedly withdrew funds from the banking system.

The improvement in available cash has been accompanied by lower interbank funding rates.

The Open Repo Rate declined by 100 basis points to 21 percent, while the overnight lending rate fell by 51 basis points to 21.76 percent.

The movement followed the implementation of the CBN’s revised monetary policy corridor after the Monetary Policy Committee reset the Monetary Policy Rate from 26.5 percent to 23 percent at its meeting on Tuesday.

Under the revised framework, the Standing Facilities Corridor was adjusted to +50/-300 basis points around the benchmark rate.

This effectively places the lower end of the corridor at 20 percent, providing a new reference point for short-term money-market rates.

The latest liquidity expansion was supported by large inflows from maturing securities.

About N2.27 trillion entered the financial system from maturing OMO bills, adding to cash already available to banks and contributing to downward pressure on short-term rates.

Banks also placed substantial excess funds with the CBN through the Standing Deposit Facility, with usage rising to about N7.34 trillion.

The combination of abundant liquidity and the lower policy corridor has started to transmit across Nigeria’s fixed-income market.

Average Treasury bill yields declined to 18.38 percent as investors increased demand for short-term government securities.

The 180-day secondary-market yield recorded one of the largest movements, declining by 126 basis points to 17.93 percent.

The 365-day yield fell 60 basis points to 19.12 percent, while the 91-day yield edged lower to 18.06 percent.

The adjustment was even more visible at the latest primary-market Treasury bill auction.

Stop rates declined to 15.50 percent on the 91-day instrument, 15.80 percent on the 182-day bill and 15.89 percent on the 364-day maturity.

Investor demand significantly exceeded the securities available at the auction, with subscriptions exceeding N4.2 trillion.

Government bond yields also responded to the change in monetary conditions.

Average FGN bond yields declined by about 45 basis points to 15.91 percent, with the three-year segment falling 60 basis points to 15.95 percent.

The movements show that the CBN’s policy recalibration is already influencing pricing across the domestic money and fixed-income markets even though the central bank has stopped short of characterising the decision as a conventional monetary easing cycle.

CBN Governor Olayemi Cardoso described the reduction from 26.5 percent to 23 percent as a reset intended to better align the policy rate with prevailing market conditions and improve monetary policy transmission.

The banking system’s liquidity position has changed considerably within a short period.

Earlier in September, CBN OMO operations had drained trillions of naira from the system as the central bank sought to sterilise excess funds and contain inflationary and foreign-exchange pressures.

Liquidity subsequently fell as low as N2.03 trillion following one of the major OMO operations.

The latest N7.45 trillion position means the system now holds more than three times the excess liquidity recorded at that point, demonstrating how quickly conditions can change as securities mature and new funds enter the banking system.

However, the increase does not necessarily indicate that the CBN will allow liquidity to remain at current levels.

The central bank continues to use OMO auctions and other instruments to regulate the volume of excess cash available to financial institutions.

Another substantial OMO auction could therefore absorb part of the N7.45 trillion surplus and reverse some of the recent expansion.

The size and timing of future liquidity withdrawals will be particularly important for short-term interest rates.

With the lower end of the CBN’s new policy corridor at 20 percent and significant surplus cash available in the system, money-market rates could continue moving towards the deposit facility floor unless the apex bank withdraws additional liquidity.

For Nigerian banks and investors, the combination of abundant cash and declining rates represents a significant change from the tighter monetary conditions that characterised much of the previous policy cycle.

The next phase will depend on how aggressively the CBN manages the liquidity surplus while attempting to preserve the inflation and foreign-exchange stability achieved during the preceding period of monetary tightening.