Liquidity inflows set to fall N2.31trn as CBN tightens cash

Liquidity flowing into Nigeria’s financial system is projected to fall by N2.31 trillion in October, even as the Central Bank of Nigeria (CBN) continues to absorb large amounts of cash through Open Market Operations (OMO), creating a more complex monetary environment for banks and businesses following the recent 350-basis-point interest rate cut.

The Financial Markets Dealers Association (FMDA), in its September monthly research report, projected total liquidity inflows of N13.25 trillion for October, down 14.82 per cent from the N15.56 trillion estimated for September.

The decline is expected to be driven largely by lower OMO maturities, which are projected at N9.05 trillion in October, down 21.97 per cent from N11.60 trillion in September.

OMO repayments will account for about 68.3 per cent of total expected liquidity entering the financial system, underscoring how heavily market liquidity remains tied to the CBN’s securities operations.

Treasury bill maturities are projected at N1.22 trillion, down 2.55 per cent from N1.26 trillion, while Federation Account Allocation Committee inflows are expected to rise 6.84 per cent to N2.50 trillion from N2.34 trillion.

Federal Government bond coupon payments are projected to increase sharply to N434.16 billion from N285.60 billion, while corporate bond coupons are expected to rise to N23.32 billion.

The projected reduction in liquidity comes after an aggressive September by the CBN, when OMO issuance jumped 45.61 per cent to N17.51 trillion from N12.03 trillion in August.

Combined issuance through OMO bills, Treasury Bills and FGN bonds rose 37.4 per cent to approximately N20.68 trillion, indicating the scale of funds being channelled into government and central bank securities.

Yet demand softened despite the larger supply of securities. The OMO bid-to-cover ratio fell to 3.69 times from 4.62 times, while the Treasury Bills ratio declined to 5.11 times from 5.86 times. FGN bond demand also weakened, with the bid-to-cover ratio dropping to 1.49 times from 1.57 times.

Yields nevertheless moved lower across the fixed-income market. Average Treasury Bill yields fell 147 basis points to 17.74 per cent, OMO yields declined 132 basis points to 18.49 per cent and FGN bond yields dropped 110 basis points to 15.90 per cent.

The trend is particularly significant after the CBN cut its Monetary Policy Rate by 350 basis points to 23 per cent at its September 21-22 meeting, its largest rate adjustment in the current easing cycle. The apex bank retained the cash reserve requirement at 45 per cent for deposit money banks.

The combination of lower policy rates and falling fixed-income yields could eventually ease funding conditions for businesses, but the pace of monetary transmission will depend heavily on liquidity conditions and how banks allocate their available funds.

FMDA said system liquidity increased only marginally to N4.70 trillion in September from N4.65 trillion in August, after peaking at about N8.84 trillion following FAAC inflows before being reduced through CRR debits, OMO sterilisation and primary-market issuance.

October could therefore present a delicate balance for policymakers. Lower liquidity inflows may naturally tighten market conditions, while fresh OMO sales could absorb even more cash if the CBN considers sterilisation necessary.

For businesses, the direction of liquidity matters because it influences interbank rates, the cost of bank funding and ultimately the price of credit to manufacturers, traders and other productive sectors.

The October outlook therefore points to a financial system entering a new phase: monetary policy is easing, but the CBN is still actively controlling the volume of naira liquidity. Whether the combination can deliver genuinely cheaper credit without reigniting inflation or foreign-exchange pressure will be an important test of the next phase of Nigeria’s economic recovery.