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Overnight inter-bank rate declines 6.62 point on absence of OMO auction

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The banking system has been awash with liquidity in the absence of Open Market Operation (OMO) by the Central Bank of Nigeria (CBN), which has resulted in a steady decline of rates in the money market.

Consequently, the overnight inter-bank rate, which is the rate at which banks borrow and lend to each other, has declined by 6.62 percentage point from 17.29 percent on Tuesday March 26, 2019 to 10.67 percent as of Friday, March 29, 2019.

The CBN has continued to manage liquidity in the banking system using OMO instrument but last week, the regular could not carry out any OMO auction.

Also, the Open-Buy-Back (OBB), a money market instrument used to raise short term capital, declined 6.57 percentage point to 9.86 percent on Friday, from 16.43 percent as of Tuesday March 26, 2019.

Ayodeji Ebo, managing director, Afrinvest Securities Limited, explained that the reason for the rates decline was due to absence of OMO auction by the CBN, adding that interest rates at the secondary market also declined.

Meanwhile, an inflow of about N54.1 billion from matured OMO bills hit the financial system on Thursday last week, which helped to bolster liquidity in the market.

A week before last, Treasury Bills secondary market witnessed bearish sentiments as investors sold off their positions following the CBN’s announcement of OMO Auction on Tuesday as well as a Primary Market Auction on Wednesday.  Major sell-offs were recorded at the shorter end of the curve particularly the 18-Apr-19 (+351bps), 09-May-19 (+147bps) and 02-May-19 (+123bps) maturities. Consequently, average yields across all tenors advanced 33bps Week-on-Wek to settle at 13.7 percent on Friday from 13.3 percent the previous week, according to a report by Afrinvest Securities Limited.

The nation’s currency on Friday appreciated marginally by 0.03 percent to close at N360.68k per dollar on Friday compared with N360.80k/$ traded on Thursday at the Investors and Exporters’ foreign exchange window, data from FMDQ show.

Nigeria’s external reserves have risen to $44.14 billion as at March 26, 2019, following rising inflows from Foreign Portfolio Investors.

The foreign exchange turnover at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) has totaled US$105.9 billion from the inception, when it was launched in late April 2017 through March 26, 2019 and US$9.7 billion since 27 February alone.

The surge over the past month according to FBNQuest is attributable to foreign portfolio investor (FPI) inflows to the fixed-income market, as investors are comfortable with their ability to exit the market at will.

Meanwhile, the outcome of the concluded general elections further gave the foreign investors comfort that the current foreign-exchange policies are likely to remain in place.

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) said last week at the BusinessDay conference that over $6 billion has been flown into the local bond market in one month, indicating confidence in the economy.

The FPI inflows have enabled the CBN to become a regular buyer of FX on NAFEX, such that gross official reserves have increased by US$1.73 billion to US$44.04 billion since the presidential election through to 25 March. Both oil price trends, and the FPI surge into local money and debt markets provide a temporary floor to reserves.

According to FBNQuest, In the event of an unanticipated exit of FPIs from the local markets, which would make the CBN a regular seller at NAFEX, there is still a healthy buffer against additional shocks. Estimates on the high side put the stock of FPI monies in the market at US$17 billion.

The CBN on Tuesday surprised the Nigerian analysts, economists and investors with a 50 basis point 0.5 percent reduction in its benchmark interest rate to 13.5 percent from 14 percent since July 2016.

“The reduction in MPR by 50 basis points signals the CBN’s desire to relax monetary policy to support economic growth. Obviously, it is a right response to the declining inflationary pressure and the relative stability in exchange rate which have prevailed for quite some time”, Uche Uwaleke, professor of finance and capital markets, chair, banking and finance department, Nasarawa State University Keffi, Nasarawa State, said.

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