Excess cash in Nigeria’s banking system rose to N6.28tn at the end of last week, up from N3.71tn a week earlier, as banks prepared for fresh inflows of about N5tn into the financial system.
The increase represents a 69.3 per cent rise in surplus liquidity, reflecting the impact of maturing Central Bank of Nigeria bills and funds placed by banks with the apex bank.
Investment firms said the market recorded an inflow of N2.41tn from matured Open Market Operations bills, while the average amount banks deposited with the CBN through its Standing Deposit Facility stood at about N4tn during the week.
The rise in liquidity eased some pressure on banks’ short-term funding needs, although money market interest rates remained relatively high.
Market participants expect further inflows from the Federation Account Allocation Committee, maturing CBN bills and Nigerian Treasury bills to increase the amount of cash available to banks this week.
The anticipated inflows include about N2.43tn in allocations to states from the Federation Account, N2.07tn from maturing OMO bills and N399bn from matured Nigerian T-bills.
Together, the expected payments amount to nearly N4.9tn, which could further increase surplus funds in the banking system.
The additional liquidity could encourage banks and other investors to increase their holdings of short-term financial instruments, potentially easing pressure on money market rates.
However, the final impact will depend on how much of the money remains in the banking system and how much is absorbed through government securities and CBN operations.
Analysts expect the CBN to consider issuing more OMO bills to absorb some of the excess cash and prevent liquidity from pushing short-term interest rates lower.
OMO bills are securities the central bank uses to manage the amount of money circulating in the financial system. By selling the bills, the CBN draws funds out of banks and other investors.
The banking system recorded stronger liquidity last week amid limited active OMO operations and relatively modest withdrawals through the Treasury bill auction.
However, settlement payments for the forthcoming Federal Government bond auction could absorb part of the expected inflows, limiting their effect on liquidity and yields in the secondary bond market.
Cowry Asset Management Limited said the expected inflows could support demand for short-term investments and reduce upward pressure on money market rates.
The firm added that investors would also adjust their portfolios following the latest inflation reading of 14.63 per cent.
Investors are weighing the benefit of locking in current yields against the possibility that inflation will continue to decline and monetary policy may change.