A financial expert, Dr Tunde Awesu, says the N930 billion decline in banking system liquidity has yet to significantly push up short-term interest rates, indicating that the financial system remains sufficiently liquid.
Awesu, President, Metropolitan School of Business and Entrepreneurship, said this in an interview with the News Agency of Nigeria (NAN) on Wednesday in Lagos while assessing the recent liquidity tightening in the banking system.
Awesu said the development should be viewed against the significant liquidity injection recorded in August following the maturity of Treasury instruments.
NAN reports that the Central Bank of Nigeria (CBN) data showed that N2.48 trillion flowed into the banking system on Aug. 11.
This was due to the maturity of Open Market Operations (OMO) securities, pushing system liquidity to N6.81 trillion.
However, latest money-market data showed that liquidity subsequently declined by N930 billion to N3.66 trillion following the settlement of a Treasury Bills auction.
The overnight lending rate consequently rose marginally by two basis points to 22.20 per cent from 22.18 per cent, while the Open Buy Back (OBB) rate remained unchanged at 22.00 per cent.
Awesu said the modest movement in short-term rates suggested that the liquidity withdrawal represented more of a correction of excess liquidity than an acute funding squeeze.
“I think the immediate context is the fact that the CBN injected liquidity in the system through the retirement of some treasury instruments in August, which significantly increased liquidity in the money market.
“So, the recent operation sought to effect some ‘correction’ to the excess liquidity in the system,” he said.
According to him, the two-basis-point movement in the overnight rate was insignificant relative to the volume of liquidity withdrawn.
“The significance of the liquidity tightening can be read off the movement in the overnight rate, which moved by only two basis points from 22.18 to 22.20 per cent.
“This indicates that while the volume of money withdrawn from the system is high, the system is still sufficiently liquid enough not to significantly impact the overnight rates,” he said.
Awesu said the unchanged OBB rate at 22 per cent further reinforced the view that liquidity conditions remained relatively comfortable.
He said the CBN’s Open Market Operations were currently achieving their objectives of managing liquidity, stabilising interest rates and moderating inflation.
The expert said the development was unlikely to immediately translate into higher borrowing costs for businesses, investors and the wider public, particularly with the Monetary Policy Rate unchanged.
He, however, warned that sustained liquidity tightening through OMO could eventually push short-term interest rates higher and increase borrowing costs.
“However, if the trend of tightening liquidity through OMO is sustained by the CBN, then we may see a significant rate increase that will translate to increased borrowing cost for businesses and the investing public,” he said.
The CBN continues to use OMO and Treasury Bills operations as part of its liquidity-management framework, with recent auctions attracting strong demand from investors.
(NAN)
