How ₦930bn liquidity drain fails to lift short-term rates

A ₦930 billion withdrawal from Nigeria’s banking system liquidity has so far failed to trigger a meaningful increase in short-term interest rates, suggesting that banks are still carrying enough cash to absorb the latest tightening without a major funding squeeze.

Financial expert and President of the Metropolitan School of Business and Entrepreneurship, Dr Tunde Awesu, said the modest movement in money-market rates showed that the recent liquidity withdrawal was largely correcting excess cash rather than creating an acute shortage of funds.

His assessment followed a decline in system liquidity from ₦4.59 trillion to ₦3.66 trillion after settlement of a Treasury Bills auction, according to the latest money-market data.

The reduction came after a much larger liquidity injection in August when the maturity of Central Bank of Nigeria (CBN) Open Market Operations securities released ₦2.48 trillion into the banking system on August 11, pushing system liquidity to ₦6.81 trillion.

Despite the latest ₦930 billion withdrawal, the overnight lending rate increased by only two basis points to 22.20 per cent, from 22.18 per cent, while the Open Buy Back (OBB) rate remained unchanged at 22.00 per cent.

Awesu said the small movement in rates relative to the amount of liquidity removed was evidence that the banking system remained sufficiently funded.

“I think the immediate context is the fact that the CBN injected liquidity in the system through the retirement of some treasury instruments in August, which significantly increased liquidity in the money market,” he said.

He said the subsequent operation should therefore be viewed as a correction to the excess liquidity created by the earlier maturities.

“The significance of the liquidity tightening can be read off the movement in the overnight rate, which moved by only two basis points from 22.18 to 22.20 per cent,” Awesu said.

“This indicates that while the volume of money withdrawn from the system is high, the system is still sufficiently liquid not to significantly impact the overnight rates,” he added.

The unchanged OBB rate further supports the view that banks are not yet facing significant difficulty in accessing short-term funding.

The development is important for businesses and investors because money-market rates are an early indicator of the direction of short-term financing costs.

Awesu said the latest liquidity adjustment was therefore unlikely to immediately translate into significantly higher borrowing costs, particularly with the CBN’s Monetary Policy Rate (MPR) unchanged.

He, however, warned that the impact could become more pronounced if the central bank continues withdrawing liquidity through Open Market Operations.

“However, if the trend of tightening liquidity through OMO is sustained by the CBN, then we may see a significant rate increase that will translate to increased borrowing costs for businesses and the investing public,” he said.

The CBN uses OMO and Treasury Bills operations to manage excess liquidity and influence short-term market conditions as part of its broader monetary-policy framework.

The current market position suggests that the first round of tightening has not yet materially altered funding conditions because the banking system entered the latest operation with substantial excess liquidity following August’s Treasury instrument maturities.

For investors, the immediate signal is that the money market remains relatively liquid despite the sizeable withdrawal. The more important indicator to watch will be whether successive liquidity-draining operations begin to push overnight and OBB rates decisively higher.

A sustained rise in short-term rates would increase funding costs for banks and businesses and could also make fixed-income instruments more attractive relative to risk assets. For now, however, the ₦930 billion liquidity drain has produced little movement in borrowing rates, indicating that Nigeria’s banking system still has some room to absorb further monetary tightening.