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FX, inflationary pressures to moderate on N150bn OMO auction

Again, Customs slashes FX duty rate to N1,238/$

Central Bank of Nigeria on Thursday mopped up about N150 billion through OMO auction as it strengthens efforts at moderating inflationary pressure while reducing excess liquidity putting pressure on the demand side of the foreign exchange (FX) market.

The OMO auction which started at 9.40 am on Thursday and closed at 10.40 am had N30 billion in 96-day tenured bills, N40 billion in 187-day, and N80 billion of N362-day bills.

This is the apex bank’s first OMO auction since it on Tuesday, July 25 raised the benchmark interest rate by 25 basis points to 18.75 percent and narrowed the interest rate corridor from +100/-700 to +100/-300 basis points around the MPR.

“Though we assert that the rate hike is modest considering Nigeria’s inflation challenges, we highlight the Committee’s subtle mention of utilising other tools (potentially involving an increase in the cash reserve ratio of banks not meeting minimum loan-to-deposit ratios) that could be pivotal in liquidity management,” said Meristem research analysts in a recent note.

The Nigerian naira fell further on Thursday at N920 per dollar at the parallel market.
Data from FMDQ showed that the naira opened at N757 per dollar on Wednesday at the official market.

CBN’s OMO is aimed at mopping-up excess liquidity in the system to check inflation. The inflation rate for June stood higher at 22.79 percent.

Muyiwa Oni, head, equity research, West Africa at Stanbic IBTC Bank noted that inflationary pressure increased since the removal of the petrol subsidy.

The analysts noted that the removal of the fuel subsidy in Nigeria caused a sharp strengthening of price pressures in June. “In turn, rates of expansion in output and new orders softened but remained marked nonetheless. Business confidence dipped to a near-record low. Intensifying inflationary pressures encouraged companies to expand inventories to try and get ahead of further price increases. Meanwhile, employment was up modestly for the second month running”.

The CBN sells T-Bill in two market platforms the first one primary market auction and the secondary market platform called the OMO.

The secondary market is where banks and other approved dealers change T-Bill among themselves.

The Central Bank of Nigeria, after its two-day Monetary Policy Committee (MPC) in Abuja on Tuesday, July 25, 2023, raised its benchmark interest rate known as the Monetary Policy Rate (MPR) by 25 basis points to 18.75 percent from 18.5 percent.

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By unanimous agreement of 11 members present at the meeting, the CBN also narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.

Nigerian Treasury bill yields across short, medium, and long-term tenors had surged after the Central Bank of Nigeria (CBN) narrowed its interest rate corridor.

An asymmetric corridor is a tool used by Central Banks to increase the flexibility of monetary policy.

Ahead of Thursday’s auction, Lagos-based analysts at United Capital said they envisage that liquidity will remain pivotal in the direction of fixed-term deposit (FTD) and money market rates, among other fundamentals.

At the auction, they had expected rates to taper on the back of demand factors outweighing the supply of bills.

“In the secondary market for NT bills, we expect the buying interest to persist, as investors take advantage of the relatively elevated rates. The demand for money from the banks will most likely remain conservative because they need to comply with the 65 percent LDR.

“As a result, we expect the low demand from the banks to provide a form of buffer for rates to inch slightly higher, staying elevated at the upper region of the single-digit terrain (1.0 percent – 9.9 percent). Overall, we expect more volatility in yields at the NT bills market segment,” the analysts said.