Nigeria’s interbank borrowing costs declined on Monday as surplus liquidity in the financial system rose to N4.04tn, easing immediate funding pressures on banks ahead of a major Central Bank of Nigeria liquidity operation.
Banking system liquidity increased by 8.99 per cent from N3.71tn recorded previously, according to market data from AIICO Capital Limited.
The increase coincided with a decline in key overnight funding rates, although market participants remained focused on the CBN’s expected response to the excess cash in the financial system.
The overnight rate fell by 13 basis points to 20.72 per cent from 20.85 per cent, while the open repo rate declined by 40 basis points to 20 per cent from 20.40 per cent
The Nigerian Overnight Financing Rate, however, remained unchanged at 20 per cent.
The movements indicate a modest easing in short-term funding costs as banks operated with a larger pool of available liquidity.
Market attention has shifted to a N2.41tn Open Market Operations bill maturity scheduled for Tuesday, which is expected to inject additional funds into the banking system.
The repayment could increase the amount of cash available to banks unless the CBN withdraws some of the funds through a fresh OMO auction or another liquidity-management measure.
OMO instruments allow the apex bank to influence liquidity by selling short-term securities to financial institutions, thereby absorbing excess cash from the system.
Analysts expect the central bank to consider an OMO auction to contain the expansion in surplus liquidity and manage its implications for short-term interest rates.
Herwood Securities Limited said the direction of money market rates would depend partly on the outcome of the anticipated auction and its impact on system liquidity.
Despite the increase in surplus funds, money market rates remain around 20 per cent, indicating that short-term financing costs are still elevated.
The overnight rate measures the cost of borrowing funds for one day, while the open repo rate reflects the cost of obtaining short-term secured funding. The NOFR provides another benchmark for overnight naira funding conditions.
Changes in these rates influence banks’ short-term funding decisions and can feed into broader money market pricing.