N8.57trn liquidity surge puts CBN’s new easing cycle to test

Nigeria’s banking system could be flooded with as much as N8.57 trillion in liquidity this week as maturing Central Bank of Nigeria (CBN) Open Market Operation (OMO) bills and government bond coupons release fresh cash into banks, creating a major test for the apex bank’s newly accommodative monetary policy.

System liquidity had already climbed to N5.98 trillion in the week ended September 25 from N2.86 trillion a week earlier, according to market data, leaving banks with substantial surplus funds even before another N2.43 trillion in OMO maturities and about N164 billion in bond coupon payments are due.

If the funds remain in the banking system, available liquidity could rise to about N8.57 trillion.

The size of the potential injection is significant because it comes only days after the CBN cut its Monetary Policy Rate (MPR) by 350 basis points to 23 per cent at its September 21-22 Monetary Policy Committee meeting, the first major easing move of the current cycle. The Standing Facilities Corridor was also reset to +50/-300 basis points around the new MPR.

The combination of cheaper money and a large liquidity injection could accelerate the repricing of government securities, reduce short-term funding costs and eventually improve banks’ capacity to extend credit to businesses.

But it also creates a fresh sterilisation challenge for the CBN.

Banks already placed more than N7 trillion through the Standing Deposit Facility during the past week, indicating that a substantial volume of excess cash is yet to find productive deployment.

Money-market rates have already responded to the liquidity build-up. The overnight rate fell sharply to 20.77 per cent on a week-on-week basis, while the funding rate declined to 20.40 per cent.

The repricing has also spread to government securities. Average Treasury bill yields fell to 17.89 per cent, while the September 23 auction saw stop rates fall to 15.50 per cent for the 91-day bill, 15.80 per cent for the 182-day instrument and 15.89 per cent for the 364-day bill.

The decline in yields could provide some relief to government borrowing costs and eventually create room for cheaper private-sector financing. However, the benefit will depend on whether banks redirect part of the excess liquidity towards productive lending rather than keeping it in low-risk government and central-bank securities.

The CBN has already shown its willingness to absorb surplus funds. At its September 24 OMO auction, the apex bank offered N1 trillion of bills and received N6.1 trillion in subscriptions, before allotting N2.3 trillion. The Q3 Treasury Bills programme has also seen the CBN allot N8.14 trillion, 40.34 per cent above the N5.8 trillion target.

The latest liquidity build-up therefore presents a delicate policy balance.

Too little sterilisation could leave banks awash with cash, potentially increasing demand for foreign exchange and other financial assets and weakening efforts to keep inflation under control. Excessive sterilisation, on the other hand, could slow the transmission of the rate cut and limit the availability of cheaper credit to businesses.

For manufacturers, traders and other borrowers, the real test of the easing cycle will be whether lower money-market rates translate into lower lending costs and greater access to long-term finance.

The coming weeks will therefore show whether the CBN can manage the N8.57 trillion liquidity surge without undermining its rate-cut strategy, while ensuring that surplus banking-system cash ultimately supports production, investment and economic growth rather than simply chasing financial assets.