Money market liquidity eases to N5.8tn

The Nigerian money market maintained a steady posture mid-week as the banking system’s massive liquidity surplus experienced a marginal narrowing. Despite the contraction, the financial system remains significantly awash with cash, shielding interest rates from upward pressure even in the face of recent government debt auctions.

The Nigerian Overnight Rate and Open Repo rates remained relatively stable on Wednesday, persisting in a “liquidity-heavy” environment where the absence of a midweek Treasury bill auction and a lack of significant funding pressures have allowed banks to maintain comfortable cash positions.

Banking system liquidity opened on Wednesday with a surplus of N5.79tn. While this figure remains substantial, it represents a N1.99tn decline from the prior session’s opening balance of N7.78tn.

Analysts at AIICO Capital Limited noted that this decrease was primarily driven by N276.79bn outflow, representing the settlement of the April bond auction held earlier in the week.

A notable indicator of the current cash glut is the record-high volume of idle funds being parked at the apex bank. Deposit money banks’ inflows into the Central Bank of Nigeria’s Standing Deposit Facility reached N5.30tn on Thursday, according to the MarketForces Africa report.

The high usage of the SDF, a window where banks deposit excess cash with the CBN for a fixed interest rate, underscores the challenge the apex bank faces in mopping up excess money supply to curb inflation.

The current liquidity landscape reflects a delicate balancing act for the Central Bank of Nigeria. On one hand, high liquidity typically keeps short-term borrowing costs for banks low, which can be favourable for the private sector. On the other hand, the CBN has been aggressive in its hawkish monetary policy, recently hiking the Monetary Policy Rate to tighten the money supply.

The massive surplus of over N5tn in the system is largely attributed to recent Federation Account Allocation Committee disbursements and coupon payments on government securities. However, with the settlement of the April bond auction, the government is successfully mopping up some of this excess to fund the national budget.

Investors are now closely watching for the next round of Treasury bill auctions and further CBN interventions (such as OMO bills) to see if the regulator will take more aggressive steps to drain the remaining N5.79tn surplus to stabilise the naira and control inflationary pressures.