High liquidity brings down money rates to 5-year low

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LAGOS — Moves by Central Bank of Nigeria, CBN, to influence money rates downwards brought down Federal Government bonds’ rate to a five-year low, yesterday, as banks’ liquidity position surged up to N850 billion.

Bond’s rates and other inter-bank interest rates mirror cost of funds in the money market which in turn determine interest rates on lending by banks to their customers.

Nigeria’s 2017 bond fell by 110 basis point to 6.9 percent, the lowest level since 2010, while the 2015 benchmark bond rate dropped by 72 basis point to 10.25 percent.

Similarly’, banks’ overnight funds rate hovered at market average of 0.75 per cent yesterday, down from average 0.9 per cent opening rate on Monday.

But the CBN’s unannounced policy agenda of transmitting the low cost funds into economic activities in real sector and general lending appear to be at odds with the banks as their lending rates still remained high as at yesterday.

Prime lending rates stilled hovered around 20 per cent, the level it has been for several months now while other lendings have even attracted increased interest rates to as much as 30 per cent, all costs inclusive.

A treasury executive with a tier-1 bank told Vanguard that lending rates would not yet respond to the dropping bond rates and other inter-bank rates because other credit components such as risk content are still negative and are getting worse due to down-turn in the economic outlook.

The massive drop in inter-bank rates followed sustained high liquidity in the banking system orchestrated by CBN’s new liquidity policy which saw credit balance of banks, yesterday, rising to N850 billion, almost 70 per cent from N514 billion opening figure on Monday.

Though the balance is expected to drop to about N600 billion by tomorrow following CBN’s debiting of banks’ accounts for foreign exchange bids, the liquidity surge would likely overflow N1 trillion by end of the week as more federal government maturing obligation.

Given the current liquidity levels in the system, money market operators expect bond market to remain bullish as investors continue to search for viable opportunities in the fixed income space given the unappealing state of the equities market at the moment.

They are also less optimistic that the lower rates at the inter-bank money market would soon translate into a decline in lending rates for economic activities.

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