A bail out liquidity management by the Central Bank of Nigeria, CBN, may ensue in the banking system if liquidity situation fails to improve significantly this week, as the money market situation toughened last week.
It was learnt that the apex bank had already intervened following a tightening up in net liquidity flow in the system last week with an injection of N211.9 billion worth of Standing Lending Facility, SLF, to push down interest rates which was rising astronomically by Wednesday.
SLF is a mechanism that central banks use when lending funds to primary dealers (banks and discount houses).
The facility provides financial institutions with access to funds to satisfy reserve requirements using the overnight lending market. SLFs are also used to increase liquidity over longer periods such as by using term auction facilities.
The apex bank also stepped up intervention in the foreign exchange market in the Bureau de change segment to reverse exchange rate rise in the parallel market last week, while also closing the huge gap between official and parallel market rates.
The low liquidity in the financial market continued last week on the heels of narrowing deposit inflow from the public sector due to Federal Government’s Treasury Single Account, TSA, policy, causing money market rates to trend high.
With liquidity opening balance of N72.3 billion on Monday, Open Buy Back, OBB, and Overnight, O/N, rates, which settled at 35 percent and 37.5 percent, respectively, had surged up to 100.8 percent (OBB) and 105.3 percent (O/N) on Wednesday as no major credit was received within the financial system.
OBB and ON rates are the most sensitive to liquidity situation on the money market, while pointing to the possible spill over to lending rates if sustained over a period of time.
Also, banking industry liquidity balance had crashed to below N50 billion as a result of the 48-hour requirement for banks to fulfill their forex obligations to the apex bank, forcing CBN to intervene with the SLF to bring down the rates— OBB and O/N to 30.0 percent and 40.9 per cent, respectively, week-on-week.
However, in the new week, money market operators expect rates to rise marginally due to further withdrawals of cash by Nigeria National Petroleum Corporation, NNPC, and probable Open Market Operation, OMO, auctions by CBN.
In the face of near zero fiscal policy complements, the apex bank has been inundated with monetary rates instability with consequences on the macro-economic indices, especially inflation and gross domestic products, GDP, since the advent of President Muhammadu Buhari’s regime three months ago.