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N224bn inflow to boost interbank liquidity

CBN injects $501m as IMF insist on single forex market
Experts disagree on September inflation figure

By Babajide Komolafe

THE interbank bank money market will, this week, receive liquidity boost of N224 billion but with little prospect of moderation in cost of funds.

The market for most parts of last week experienced intense scarcity of funds which sent cost of funds above the 50 per cent mark. The heightened liquidity squeeze was aggravated by liquidity mop-up operation of the Central Bank of Nigeria (CBN) as well as outflow for dollar purchase in the Secondary Market Intervention Sales (SMIS) auction conducted by the apex bank.

Financial Vanguard analysis revealed that the apex bank mopped up N167 billion from the market through secondary market or Open Market Operations (OMO) treasury bills. The N250 billion TBs offered by the apex bank was undersubscribed as total public subscription stood at N189 billion. The impact of the outflow on market liquidity and cost of funds, however, abated on Thursday following the inflow of N61.5 billion.

The above development sparked volatility in cost of funds, as short term lending rates shot up to 50 percent between Monday and Wednesday before dropping to 34 percent at the close of business on Friday. However, when compared with the previous week’s level, short term interest rate rose by average of 8.4 percent.

Data from the Financial Market Dealers Quote (FMDQ) show that interest rate on Collateralised lending (Open Buy Back, OBB) rose by 75 basis points (bpts) to 33.33 percent last week from 25.83 percent the previous week while interest rate on Overnight lending also rose by 93 bpts to 35.33 from 26 percent the previous week.

Financial market analysts were however doubtful of further reduction in cost of funds this week. While the market will receive liquidity boost of N224 billion from maturing TBs, which will more than offset impact of outflow of N133.8 billion   through TBs auction on Wednesday, the possibility of   further liquidity mop up by the CBN undermines expectation of decline in cost of funds.

CBN injects $50m as IMF insist on single forex market

The CBN last week stepped up its intervention in the foreign exchange market as it injected $501.3 million into the interbank market. In addition to the regular weekly injection of $195 million sold on Monday, the apex bank on Friday injected $306.3 million through the Secondary Market Intervention Sales (SMIS) auction conducted during the week.

In a statement issued on Friday announcing the outcome of the auction, Acting Director, Corporate Communications Department, Mr. Isaac Okorafor, said that the $306.3 million injection followed bids received from forex dealers by the apex bank. He said that the deals in the retail window represent requests from the various sectors in the Secondary Market Intervention Sales (SMIS), thereby providing a boost to the respective sectors.

Okorafor stressed that the apex bank would continue to increase liquidity based on genuine demands in the market to enhance forex stability.

As a result of the increased intervention, the naira was stable against the dollar in the parallel market last week, while it appreciated marginally by 21 kobo in the Investors and Exporters (I&E) window. According to the Financial Market Dealers Quote (FMDQ), the indicative exchange rate for the window, dropped to N360.43 per dollar last week from N360.64 per dollar in the previous week.

Meanwhile, the IMF last week reiterated its call for a single foreign exchange market in Nigeria. Speaking during the Africa Department press briefing at the just concluded 2017 annual meetings of the International Monetary Fund and the World Bank, Director, Africa Department, Africa, Mr. Abebe Aemiro Selassie, said that while the Fund is encouraged by the improved conditions in the nation’s foreign exchange market, it hopes to see a single and liquid forex market in the country.

He said: “It has been very good progress on reducing the imbalances on the foreign exchange market over the last several months in Nigeria so we are encouraged on that progress. Ultimately I think the objective has to be creating a liquid single foreign exchange market going forward that would be helpful.”

Analysts disagree on September inflation

Analysts in two of the top investment firms in the country last week offered different projections for the September inflation figure scheduled to be released this week by the National Bureau of Statistics (NBS). While analysts at Lagos based Financial Derivatives Company (FDC) projected inflation to drop to 15.99 percent in September, analysts at the Afrinvest Plc projected inflation would rise to 16.1 percent.

Headline inflation

Speaking in the company’s bi-monthly bulletin issued last week, FDC analysts said: “We are projecting a slight decline in year-on-year headline inflation to 15.99 percent in September. This is a 0.02 percent decrease from the previous month, making it the eight consecutive monthly decline in 2017. This sustained but marginal reduction can be partially attributed to the effect of tight liquidity in the system, evidenced by a contraction in money supply by 11.06 percent to N21.85 trillion in August. We noticed a widespread ease in commodity prices, usually associated with early harvest.We also expect month-on-month inflation to decline to a one year low of 0.81 percent (10.16 percent annualized) from 0.97 percent (12.28 percent annualized) in August.”

On their part, Afrinvest analysts said: “We project Year on Year (Y-o-Y) Headline Inflation to rise 8bps, relative to August, to 16.1 percent. Headline inflation has negatively surprised since the start of the year, with Month on Month (M-o-M) CPI growth averaging 1.4 percent on the back of increased pressure on food prices which took Food Inflation to a high of 20.3 percent in July.

“However, we have observed a steady moderation in M-o-M Headline CPI growth since peaking at 1.9 percent in May to 1.0 percent in August. With the thinning out of high-base effect which has essentially anchored the moderation in Y-o-Y inflation in 201, we expect Y-o-Y Headline Inflation to marginally trend higher in the month.”


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