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Excess liquidity to persist as N608bn inflow hits interbank

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By Babajide Komolafe

THE interbank money market will this week, receive inflow of N608 billion from maturing treasury bills, aggravating the excess liquidity which prompted cost of funds to fall last week.

Last week, the market enjoyed inflow of N400 billion from matured Open Market Operation, OMO, treasury bills. As a result market liquidity absorbed the liquidity mop of N315.33 billion by the Central Bank of Nigeria, CBN, through OMO bills.

Consequently, cost of funds fell with average short term interest rate falling by 313 basis points to 9.17 percent last week from 12.13 percent the previous week. Cost of funds is expected to remain stable or drop further this week as the inflow of N608 billion expected from maturing treasury bills will offset impact of outflow of N178.41 billion through primary market TBs auction to be held by the CBN.


Confirming this, analysts at Lagos based Zedcrest Capital Limited said: “We expect rates to be relatively stable in the coming week, as there are no significant funding pressures anticipated. Rates should, however, trend significantly lower if inflows from Federation Accounts Allocation Committee (FAAC) payments hit the system.”

Analysts at Cowry Asset Management Limited also projected that,“This week, CBN will sell T-bills amounting to N178.41 billion which will partly offset the maturing treasury bills worth N608.60 billion. We expect stop rates for 91-day and 182-day to remain flat while 364-day stop rate to rise slightly. Also we feel CBN is poised to mop up, via OMO sales, excess liquidity from FAAC injections that might likely come during the week. Nevertheless, we expect ease in the financial system liquidity to be sustained with resultant decline in interbank rates.”

Naira in mixed performance

The naira recorded mixed performance in the foreign exchange market while turnover in the Investors and Exporters, I&E, window slipped by 0.9 percent last week. The naira appreciated by 96 kobo in the I&E window last week, as the indicative exchange rate for the window fell to N361.62 per dollar on Friday from N362.58 per dollar the previous week.

Parallel  market

Financial Vanguard analysis revealed that the volume of dollars traded in the window dropped by 0.9 percent to $856.07 million last week from $863.85 million the previous week. The naira, however, depreciated by 50 kobo in the parallel market as the exchange rate for the market rose to N358.5 per dollar last week from N358 per dollar the previous week. The CBN on its part sustained its weekly injection of $210 million into the interbank foreign exchange market as well as dollar sales to Bureaux De Change, BDC, operators.

Inflation to rise in H2’18

While financial market operators expect that the June inflation to be announced today by the National Bureau of Statistics, NBS, will be lower than the 11.61 percent recorded in May, Financial Derivatives Company, FDC, analysts, however, hinted that the 17 months downward trend in inflation will give way to upward trend in the second half of the year.

This view was also echoed by the International Monetary Fund, IMF, in the report of the staff mission held from June 29 to July 9, which projected inflation to rise in Nigeria in the second half of the year. FDC analysts stated: “Nigeria’s headline inflation is likely to slip 0.51 percent to 11.1 percent in June, making it the 17th consecutive monthly decline. Like most Sub-Saharan African economies, Nigeria’s rate of inflation is now coming close to the African average of 10 percent.

Whilst this sounds like good news to any observer, it is noteworthy that the rate of decline in the price level has slowed significantly. This is partly attributable to waning base year effects and the normalization of the inflation curve. Also equally significant is the projection that month-on-month inflation is expected to rise again to 1.13 percent (14.40 percent annualized). The import of this divergence between the monthly and annual inflation movement is that it would appear that the annual inflation is likely to bottom out very soon.”

On their part, IMF staff stated: “Inflation would pick up in the second half of 2018 as base effects dissipate and higher spending and supply constraints in agriculture put pressure on prices. Increased oil exports would keep the current account in surplus, helping stabilize gross international reserves even if the current pace of foreign portfolio outflows continues.”


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