November 20, 2017

Cost of funds to fall as over N700bn inflow hit interbank

keystone bank

Banking hall

•Credit to private sector rises to N22 trillion in Sept
•MPC to maintain status quo for 8th consecutive time

By Babajide Komolafe

Cost of funds in the interbank money market will decline this week in response to inflow of over N700 billion from matured treasury bills and statutory allocation  to the three tiers of government.

Financial Vanguard analysis revealed that this week, the market will experience inflow of N200 billion on Thursday from maturing treasury bills (TBs).

Also the Federal Account Allocation Committee (FAAC) is schedule to meet this week to disburse monthly statutory allocation funds to the three tiers of government for October. The Committee last month disbursed N558 billion, the third highest monthly allocation this year. The Committee is expected to disburse over N500 billion this week, thus further boosting liquidity inflow into the interbank money market.

Consequently, cost of funds is expected to fall this week, contrary to the sharp increase experienced last week.

Data by the Financial Market Dealers Quote (FMDQ) revealed that average short term interbank interest rate rose by 1,995 basis points last week. Interest rate for Collateralised lending (Open Buy Back, OBB) rose by 1,950 bpts to 26.67 per cent last week Friday from 7.17 percent the previous week. Similarly, interest rate on Overnight lending rose by 2,041 bpts to 27.67 percent last week Friday from 7.26 percent the previous week.

The sharp increase in cost of funds was prompted by liquidity outflows due to foreign exchange sale of $295 million and TB issue of N212.44 billion by the Central Bank of Nigeria (CBN), which cancelled out the impact of N208.57 billion inflow from matured TBs during the week.

Credit to private sector rises to N22tr in Sept

Credit to private sector recorded marginal increase of 0.11 percent to N22 trillion in September. On the other hand, credit to the government recorded a stronger growth of 2.89 percent to N4.6 trillion during the month.

The above were highlights of the CBN’s Deposit Corporation survey for September.

The survey showed a 0.47 percent month-on-month (m-o-m) increase in Broad Money to N21.95 trillion in September – as Net Foreign Assets (NFA) increased m-o-m by 3.26 percent to N10.05 trillion, thus offsetting a m-o-m 1.77 percent fall in Net Domestic Assets (NDA) to N11.90 trillion.

On asset creation, the increase in NDA resulted from a 0.61 percent m-o-m rise in Net Domestic Credit (NDC) to N26.98 trillion, accompanied by a 2.58 percent increase in Other Liabilities (net) to N15.08 trillion.

A breakdown of NDC showed a 2.89 percent m-o-m increase in Credit to the Government to N4.46 trillion which significantly outpaced the 0.11 percent increase in Credit to the Private sector to N22.02 trillion as the public sector continued to crowd-out the private sector.

The mild growth in credit to the private sector was, in part, informed by decreasing appetite for risk assets by lenders in the face of high yield safe assets.

Increase in Broad Money also followed a 0.59 percent m-o-m decline in Quasi Money (near maturing short term financial instruments) to N11.89 trillion, accompanied by a 1.75 percent rise in Narrow Money to N10.06 trillion of which Demand Deposits increased by 3.12 percent to N8.63trillion.

Indicative of tightened monetary policy conditions, Reserve Money (Base Money) also increased m-o-m by 1.33 percent to N5.56 trillion as bank reserves increased m-o-m by 4.92 percent to N3.43 trillion while currency in circulation fell m-o-m by 4.69 percent to N1.78 trillion.

MPC to maintain ‘status quo’ for 8th consecutive time

The Monetary Policy Committee (MPC) of the CBN will meet today and tomorrow with widespread expectation that it will maintain ‘status quo’  for the 8th consecutive time.

Since, its July 2016 meeting when it raised the Monetary Policy Rate (MPR) by 200 bpts to 14 per cent while maintaining Liquidity Ratio (LR) and Cash Reserve Ratio (CRR) at 30 per cent and 22.5 per cent respectively,  in a bid to address rising inflation, the committee has left the rate unchanged in the seventh  subsequent meetings.

Majority of analysts’ projections for the meeting this week, the last for the year, indicated that this trend will be maintained till first quarter of next year.

In their projection, analysts at Lagos based Vetiva Capital Management Limited stated: “The MPC  of the CBN sits for its final meeting of the year, and we expect it to maintain the monetary policy status quo heading into 2018. Forward guidance from the September MPC meeting suggests the MPC has adopted a wait-and-see approach to economic developments until Q1’18, a decision vindicated by the stickiness of economic variables between its September and November meetings. Particularly, inflation is little changed in the last few months, giving the MPC little room to tilt away from its tight monetary policy stance. Nevertheless, the CBN itself has subtly signalled lower interest rates in the near-term – particularly through its interventions in the fixed income market – as it looks to support economic recovery.

Analysts at Lagos based Afrinvest Plc  similarly stated:  “Despite the noticeable easing of external sector pressures and improving growth prospect, we believe that in line with outcomes of previous meetings held this year, the MPC would retain rates at current level, owing to the fragility of the economic recovery and disappointing inflation numbers witnessed so far in Q3:2017.”

Also, analysts at Cowry Assets Management Plc said: “We opine that the MPC, scheduled to meet on Monday and Tuesday, October 20 and 21, 2017 respectively, will retain the benchmark interest rate, MPR, at 14 percent despite sustained moderations in inflation rate amid falling food prices, increase in global crude oil prices with attendant boost in external reserves, convergence of multiple foreign exchange rates and the return to and expected sustenance of economic growth. Our opinion is partly predicated on anticipated increase in public sector spending, in addition to anticipated increased seasonal household spending amid end-of-year festivities.”

Analysts at Lagos based FSDH Merchant Bank however differed in their projection, predicting the MPC will likely reduced to MPR. They stated: “The CBN has maintained tight monetary policy stance to curb high inflation rate and ensure foreign exchange rate stability. Thus, with the stability in the outlook of the foreign exchange market and declining inflation rate, an increase in the money supply may be appropriate.

“The short-term outlook of the Nigerian economy favours a monetary policy easing. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may either reduce the Monetary Policy Rate (MPR) by a few basis points or adjust the rates around the asymmetric corridor of the MPR at its meetings scheduled to hold on 20 and 21 November, 2017.”