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CBN in subtle quantitative easing

.Banks lukewarm to pro-lending policy

By Emeka Anaeto, Economy Editor

There were indications that Central Bank of Nigeria, CBN, may have silently effected a major shift in its monetary policy framework and liquidity policy following over seven weeks consistent high liquidity in the banking system curtesy of the apex bank. Consequently, money market analysts dubbed the development a pseudo quantitative easing, QE, cycle aimed at propping up the economy through increased bank lending leverage.

Emefiele CBN Governor
Emefiele CBN Governor

QE is a monetary policy popularized in the United States of America recently where the monetary authority adopts a policy that increases money supply by flooding financial institutions with capital in an effort to promote increased lending. As at close of financial trading last weekend banking system liquidity was N514 billion in excess with average liquidity balance of over N500 billion maintained in the past seven weeks relative to less than N200 billion pre-September.

Consequently, borrowings of banks at the CBN discount window has been on consistent decline hitting N40.5 billion last week with a weekly average of N60 billion as against over N300 billion pre-September. The current robust levels of liquidity in the system have resulted in money market rates reaching year low levels. At the close of trading last weekend the Open Buy Back, OBB, and the Overnight funds, O/N, rate had hit a new low of the year at 0.6 per cent and 1.0 per cent respectively.

The rates are now on average of less than 2.0 per cent in the past seven weeks, contrary to over 10 per cent prevailing before mid September. With this crash in interbank rates amid excess liquidity, CBN’s easing policy was aiming at getting the banks push their excess cash into lending to the private sector for productive purposes, but instead the banks are pushing the excess resources into monetary instrument such as sovereign bonds, considered riskless.

Consequently, despite crash in yields in the bonds market induced by CBN policy and excess liquidity, banks buoyed activity in bonds market with total value of bonds traded put at weekly average of N400 billion as against N200 billion pre-September 2015, a development which has forced a yields decline massively.

The bullish run was stretched into the last trading day of last week as average yields across all tenors further declined 207 points leading to further crash in average yield across all trading instruments to 11.1 per cent, the lowest so far. Commenting on this development financial analysts at Afrinvest Group said ‘’given the current liquidity levels in the system, the bond market is expected to remain bullish as investors continue to search for viable opportunities in the fixed income space”.

The only liquidity restraint over the last seven weeks has been the foreign exchange weekly auction which sucks in significant proportion of the liquidity while still leaving over 80 per cent circulating in the system. Principally CBN liquidity boost over the period came from repayment of maturing Treasury Bills without reissue of fresh ones as it had always done up until mid-September 2015.

Also the regular inflow of huge cash from the Federation Account Allocation Committee, FAAC, have continued without corresponding mop up measures CBN usually do.

According to analysts at Nairametrics, a Lagos based financial information house, “after completely ruling out the devaluation of the currency, the CBN is finding that it has fewer options in its arsenal to spur growth in the economy. Its most recent trick is to cause a flush in banking sector liquidity by staying out of the market, when it previously intervened to mop up liquidity”.

“CBN has taken an easing stance, it has reduced cash reserve requirement from 31 percent to 25 percent, to enable banks have more funds to lend to the economy (this more than offset the debit from the system due to the TSA implementation). “CBN also did not roll-over its Open Market Operation (OMO) program in the recent past week. It did not mop-up extra liquidity from the banking system, and banks could now be stuck with piles of cash that they have to find uses for.

‘’Interest rates across the money market and government debt market have taken a plunge in recent days, showing the extent of the new high levels of liquidity in the system”. According to analysts at CSL Securities, “the CBN is trying out this new and experimental variant of Quantitative Easing to spur lending to the real sector to avert growth decline.

“But with the new liquidity, banks are increasing their demand for paper securities like bonds rather than increase lending to the real sector (at least for now). Bond prices have been bid up in the process due to the increase in demand from banks. “It seems that the reason for this is that banks have not been assured of the surefootedness of this policy, given the penchant of the central bank for policy flip flops. Hence they are waiting to see how long this new liquidity drive will last”.


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