In September, the Central Bank of Nigeria (CBN) undertook significant actions to absorb N1.3 trillion from the financial system, largely through Nigerian Treasury Bills (NTBs) and Open Market Operations (OMOs), as reported by Afrinvest Research. This maneuver was executed against a backdrop of increased liquidity spurred by a substantial inflow of N903.4 billion from the Federation Account Allocation Committee. Despite the initial liquidity boost, the CBN’s involvement through NTB and OMO sales—amounting to N622.7 billion and N712.5 billion, respectively—effectively curtailed the overall liquidity in the system, highlighting the CBN’s proactive stance in addressing monetary stability.
In an effort to continue managing liquidity effectively, the CBN raised its Monetary Policy Rate and Cash Reserve Ratio to 27.25% and 50%, respectively. This strategy aimed to constrain interbank lending by ensuring that a significant portion of banks’ deposits remained with the central bank, thereby tightening the liquidity further. Despite the rigorous measures instituted, the overall liquidity position in the financial system saw a recovery, closing the month at N253.6 billion, which marked an improvement from a negative stance noted in August. These strategies reflect the CBN’s commitment to maintaining stability within the financial sector amid various pressures.
The effects of these liquidity management actions were evident in the money market, where there was a notable increase in rates. Specifically, the overnight policy rate surged by 9.9 percentage points, closing at 28.0%, while the open buyback rates rose by 8.7 percentage points to settle at 28.7%. Afrinvest attributed these increases to heightened demand for interbank funds, driven by the tightening monetary conditions introduced by the CBN, which suggests that banks were seeking additional liquidity to meet their operational needs in the face of these new regulations.
Throughout September, the CBN conducted a total of three NTB auctions and two OMO auctions, further solidifying its liquidity management strategy. Yield rates on NTBs varied during this period, reflecting investor sentiment and inflation concerns; the yields on 91, 182, and 364-day tenors declined to 17.0%, 17.5%, and 20.0%, respectively. Although generally there was a downward trend in NTB yields, investor interest particularly for longer-tenor bills remained robust due to ongoing inflationary concerns, which indicates a complex interplay between monetary policy and market expectations.
On the OMO front, the CBN successfully withdrew a significant N712.5 billion to mitigate excess liquidity and counter inflationary pressures, which was intended to strike a balance in the market to avoid overheating. However, demand for OMO instruments was relatively muted, with the 362-day tenor attracting the most subscriptions, suggesting that market participants were selective in their investment strategies. In the secondary T-bills market, average yields declined by 29 basis points to 21.5%, influenced by strong demand for certain tenors. The 91 and 364-day tenors saw significant yield reductions, while the 182-day tenor experienced increased selling pressure, resulting in a yield increase of 166 basis points to 23.5%.
Looking forward, analysts at Afrinvest have highlighted the expectation of a liquidity boost stemming from upcoming NTB and OMO maturities, expected to amount to N160.5 billion and N325.1 billion, respectively. This upcoming influx is anticipated to influence the CBN’s actions in managing liquidity as ongoing NTB auctions are expected to continue. The analysts also foresee a bullish tone for the secondary T-bills market fueled by sustained investor demand, suggesting an optimistic outlook for the financial markets despite the prevailing economic challenges. Additionally, it was noted that the CBN had previously auctioned $876.26 million to 26 qualified banks under its Retail Dutch Auction System, demonstrating its active engagement in the foreign exchange market. Such comprehensive strategies reflect the CBN’s unwavering commitment to maintaining economic stability and fostering confidence in Nigeria’s financial system.
