CBN To Combat N1.6trn Excess Liquidity In February Amidst Rising Business Confidence

CBN To Combat N1.6trn Excess Liquidity In February Amidst Rising Business Confidence


The Central Bank of Nigeria, CBN, is set to intensify its liquidity mop up efforts to deal with excess liquidity of N1.6 trillion expected in the interbank money market this month, amidst rising business confidence over improved macroeconomic conditions during the month.

The Business Expectation Survey conducted by the apex bank in January shows increased optimism in the economy, with overall Confidence Index, CI, for February rising to 62.1 percent from 25.9 percent for January.

“Respondents were optimistic of better economic conditions as their expectations on the growth of the economy rose steadily in the short run with an index of 35.5, 42.7 and 56.4 points for the current month, next six months and next twelve months respectively,” the CBN said. However, while businesses expect further appreciation of the naira this month, they also anticipate further increase in interest rates. “Majority of the respondent firms expect the naira to appreciate in the current, next and the next twelve months respectively as their confidence indices stood at 23.0, 31.9 and 44.6 points.

“Respondent firms expect borrowing rates to rise in current, next and the next twelve months as the confidence indices stood at 20.0, 6.7 and 7.6 points, respectively.”

The outlook on higher borrowing rates is in line with projection of higher interest rate (yield) on treasury bills this month as the CBN intensify its liquidity mop up to contend with excess liquidity of N1.6 trillion and sustain attractiveness of the nation’s financial market to foreign investors. Making this projection in the company’s outlook for February, analysts at Lagos based FSDH Merchant bank, said: “A total inflow of about N2.33 trillion will hit the money market from the various maturing government securities and Federal Accounts Allocation Committee, FAAC, in February 2019.

We estimate a total outflow of approximately N644bn from the various sources, leading to a net inflow of about N1.6 trillion. FSDH Research expects the market to remain relatively liquid in February 2019.

This may continue to necessitate the issuance of OMO to mop-up the liquidity in the system.

“FSDH Research believes the yields on the Nigeria Treasury Bills, NTBs, may increase further, particularly on the long end from the current levels. NTB yields are likely to be influenced largely by the level of liquidity in the banking system, the short-term borrowing needs of the government, the need to maintain price stability and election considerations.”

Meanwhile cost of funds is expected to fall slightly this week in response to inflow of N783.3 billion from maturing TBs.

Last week, cost of funds rose sharply as the CBN issued secondary market (Open Market Operations, OMO) TBs to mop up N644 billion from the market.

The outflow cancelled out the impact of N315 billion inflow from maturing TBs causing average short term interest rate to rise by 758 basis points (bpts). Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 760 btps to 18.67 percent last week from 11.07 percent the previous week. Similarly, interest rate on Overnight lending rose by 756 bpts to 19.42 percent last week from 11.86 percent the previous week.

While the apex bank is expected to step up issuance of OMO bills to mop up the anticipated inflow of N783.3 billion this week, analysts at Cowry Assets Management Limited expect improved liquidity conditions and moderation in cost of funds during the week. “In the new week, T-bills worth N783.33 billion will mature via the primary and secondary markets which will more than offset T-bills worth N153.38 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N3.38 billion, 182-day bills worth N10 billion and 364-day bills worth N140 billion.

Hence, we expect liquidity ease in the financial system to be sustained with resultant moderation in interbank rates,” they said.


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