Cash Reserve Ratio (CRR) debits on commercial banks by the Central Bank of Nigeria (CBN) have offset inflows from Open Market Operation (OMO) maturities and Federal Government of Nigeria (FGN) bond coupon payments settled in the financial markets last week.
The OMO maturities inflows worth N252.50 billion and FGN bond coupon payments N410.70 million, not only pressured system liquidity, but ensured that system liquidity settled at a net short position of N145.29 billion, lower than N401.74 billion recorded the previous week.
Commenting on the development, analysts from Cordros Securities, said: “ Next week, we expect inflows from FGN bond coupon payments N162.42 billion to support system liquidity amid no significant outflows, thus, driving the OVN rate lower”.
The Treasury bills secondary market traded on a bearish note last week due to the tight system liquidity, with average yield in the market rising by 35 basis points to 26.6 per cent. Across the market segments, the average yield pared by 1bp to 25.2 per cent at the T-bills segment but expanded by 51bps to 28.3 per cent at the OMO segment.
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“Based on our expectation of a better liquidity position in the coming week, we expect yields in the Treasury bills secondary market to trend lower,” the Cordros Securities report said.
The naira depreciated by 0.3 per cent to N1,547.58/USD at the Nigerian Foreign Exchange Market (NFEM) despite the intervention from the CBN, selling c. $300.90 million to authorised dealers. As a result, the country’s FX reserves declined by $330.12 million week-on-week to $40.42 billion (15 January).
In the forwards market, the naira rates increased across the 1-month (+0.2 per cent to N1,589.78/USD), 3-month (+0.6% to N1,654.40/USD), 6-month (+1.4 per cent to N1,751.59/USD) and 1-year (+3.0% to N1,935.72/USD) contracts.
“We highlight that while naira yields have remained attractive, the existing geopolitical risks, which have now been compounded by the expectation of rising global trade protectionism, have continued to constrain capital flows, limiting FPI inflows to the FX market. With rising demand and still limited inflows, the naira is likely to face pressure in the near term, causing a gradual naira depreciation despite CBN interventions,” the report said.
The CBN says it is ready to do whatever it takes to reduce inflation rate. The CBN listed key drivers of inflationary pressure as the strong exchange rate pass-through to domestic prices, high cost of energy and other production inputs, lingering insecurity, especially in food producing areas and legacy infrastructure deficits.
Reiterating dangers of high inflation, it said that inflation has killed many economies, and CBN is committed to ensuring that inflation rate in the country drops using the right monetary policy tools.
According to the CBN, fighting inflation will also require reducing the volume of credit banks can lend to customers and also boosting the quality of such credits.
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