Interbank rate falls further amid drop in liquidity

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The nation’s overnight interbank rate has eased further to 3.5 per cent from five per cent despite the fall in liquidity in the banking system after commercial banks set aside cash for reserves and to pay interest on deposits.

“We consider market liquidity sufficient at the present level to support transactions and this accounts for the drop in cost of borrowing among banks,” one dealer told Reuters.

Traders said liquidity dropped from around N564.35bn ($2.84bn) last week to about N401.7bn on Friday due to premium payments to the Nigerian Deposit Insurance Corporation and Cash Reserves Ratio debits on Thursday.

“The market is comfortable with the level of liquidity in the market, because many fund placers are not ready to keep their idle funds with the central bank,” another trader said.

This is the second consecutive week that the interbank rate has dropped, even though the Central Bank of Nigeria raised its benchmark interest rate from 11 to 12 per cent last month, and the CRR for commercial banks to 22.5 per cent from 20 per cent, to try to curb inflation.

Traders expect rates to be the same this week because treasury bills worth about N91bn are due to mature on Thursday and unused cash deposited for foreign exchange purchases would be refunded.

The overnight placement had risen sharply to around 13 per cent about two weeks ago after the CBN withdrew about N400bn from the banking system to meet a new Cash Reserves Ratio on deposits.

Before dropping to five per cent last Friday, the interbank rate had gradually come down from the 13 per cent high.

The CBN’s Monetary Policy Committee had about two weeks ago raised its benchmark interest rate from 11 to 12 per cent, and the CRR for commercial banks to 22.5 per cent from 20 per cent, in order to curb rising in inflation and interest rates.

The market closed at 13 per cent two weeks ago after cash payments from international oil companies operating under a joint-venture agreement with the Federal Government hit the system.

The interbank rate reflects the level of naira cash liquidity in the banking system.

The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the current market situation might linger for some days because of the slowdown currently facing the economy.

“There are challenges facing the economy now and we don’t expect any major changes in the economic situation for now,” he said.

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