Babajide Komolafe
23 September 2008
Interest rate in the interbank money market, which had been on the upward trend since July fell by 65 per cent in two days in submission to the barrage of measures announced by the monetary authorities to inject liquidity in the market last week.
From 20 per cent on Thursday, interest rate on overnight lending fell to 7.5 per cent at the close of business yesterday, while Discount Houses reduced interest rate on Open Buy Back (OBB) or collateralized lending to 9.75 per cent for 10.25 per cent.
The Central Bank of Nigeria (CBN) on Thursday announced measures to improve the liquidity in the banking system. These include 50 basis point reduction in the Monetary Policy Rate (MPR) from 10.25 per cent to 9.75 per cent, reduction in cash reserve requirement (CRR) from four per cent to two per cent, and reduction in the liquidity ration (LR) from 30 per cent to 40 per cent.
The reduction in cash reserve requirement, amount of banks' deposit that the banks must keep in cash with the CBN, translated to injection of about N146 billion into the market. Money market operators however confirmed to Vanguard that even before the money was released to banks by the apex bank, interest rate had started falling.
This they attributed to the effect of the reduction in liquidity ratio, amount of banks' deposit that must be in liquid assets like treasury bills, which automatically reduced the pressure for liquidity by each banks or the amount of funds they need to meet the liquidity ratio requirement.
Vanguard investigations however showed that despite the measures announced the big banks tried to use their liquidity power to stem the downward trend in cost of funds. This attempt failed as there was little demand for funds in the market. The downward trend in rates became very rapid towards the end of Friday as the CBN began to release the N146 billion cash reserve excess funds to the banks.
According to a senior bank dealer, cost of funds initially fell to 9.5 at the close of business on Friday before falling to 7.5 per cent yesterday as the market opened with a surplus of about N146 billion.
Interest rate in the interbank money market started its upward trend in July from 6.5 per cent until it reach 21 per cent last week.
The increase was due to a combination of factors chiefly aggressive liquidity mop up by the CBN in its bid to check liquidity build up in the economy and the concomitant effect on inflation rate.
Commenting on this in its economic report for August 2008, Money Market Association of Nigeria (MMAN) stated, " Rates were relatively high across all tenors in the month of August, when compared with obtainable rates in July. From the closing average rates of 12.96 per cent to 14.92 per cent in July, rates opened in August with a weekly average rate of 14.10 per cent and closed at an average of 15.28 per cent.
The lowest rate obtained in the month, was in the third week, with an average rate of 12.81 per cent, in the range of highest closing average for July. The experienced douse in rates in the third week was due to Federation Accounts Allocation Committee (FAAC) of July, shared in August to the tune of N441.88bn.
The observed rise in rates in the month, vis-à-vis the tightness in the market could be adduced to several reasons in the market, majority the illiquid status of the market, caused by the quantum of fund injected into the system in the month.
From a whooping sum of N 1.02 trillion in July to N441.88 billion in August, coupled with several withdrawals through foreign exchange purchase to the tune of N147.32 billion and sterilization by CBN made the market illiquid. Even the injection of N133.3bn into the market at the beginning of the month, through Reverse REPO could not douse the rising rates across all the tenor.
Another reason, that is indirectly fueling the rise in rate, is the rising rate of inflation in the system."
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