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Cost of funds decline to persist as N579bn boost interbank liquidity

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February inflation to defy CBN’s liquidity mop up measures-Analysts

By Babajide Komolafe

COST of funds in the interbank money market is expected to moderate further this week in response to inflow of N579 billion from maturing treasury bills. Last week, average short term cost of funds defied the liquidity mop up efforts of the Central Bank of Nigeria, CBN, falling by 238 basis points (bpts).

During the week, the market experienced inflow of N783.33 billion from matured treasury bills (TBs). In a bid to mop up this inflow the CBN issued N740 billion worth of secondary market (Open Market Operations, OMO) bills. This effort was, however, rebuffed by investors, hence the issue was undersubscribed with the CBN selling N545 billion. In addition, the apex bank sold N153 billion worth of primary market TBs, resulting to total outflow of N698 billion, which was lower than the inflow of N740 billion.

The Central Bank of Nigeria head office in Abuja.

Consequently interest rate on Collateralised (Open Buy Back, OBB) lending fell by 284 bpts to 15.83 percent on Friday from 18.67 percent the previous week. Similarly interest rate on Overnight lending dropped by 192 bpts to 17.5 percent last week from 19.42 percent the previous week.

Analysts at Lagos based Cowry Assets Management Limited projected that this trend will continue this week, notwithstanding the outflow of N150 billion through FGN offer by the Debt Management Office (DMO).

High prices of bread, cereal, others push November inflation to 11.28%

“In the new week, T-bills worth N578.99 billion will mature via the secondary market which is expected to boost liquidty despite the N150 billion long term debts that will be raised by Debt Management Office; hence we expect interbank rates to trend downwards”, they stated.

February inflation to defy CBN’s liquidity mop up

Meanwhile analysts at Lagos based Financial Derivatives Company Limited has projected that the CBN’s liquidity mop up effort which was instrumental to the moderate decline of inflation to 11.37 percent in January would not be effective in curbing inflationary pressures in February.

This projection followed the release of inflation data for January by the National Bureau of Statistics, NBS, on Friday. According to the NBS, the inflation rate fell (year-on-year) to 11.37 percent in January from 11.44 percent in December. The NBS stated: “The consumer price index, CPI, which measures inflation increased by 11.37 percent (year-on-year) in January 2019. This is 0.07 percent points lower than the rate recorded in December 2018 (11.44) percent.Increases were recorded in all COICOP divisions that yielded the Headline index.

“On month-on-month basis, the Headline index increased by 0.74 percent in January 2019, same rate as was recorded in December 2018 (0.74) percent. The percentage change in the average composite CPI for the twelve months period ending January 2019 over the average of the CPI for the previous twelve months period was 11.80 percent, showing 0.3 percent point from 12.10 percent recorded in December 2018.

“The urban inflation rate increased by 11.66 percent (year-on-year) in January 2019 from 11.73 percent recorded in December 2018, while the rural inflation rate increased by 11.11 percent in January 2019 from 11.18 percent in December 2018. On a month-on-month basis, the urban index rose by 0.77 percent in January 2019, up by 0.01 from 0.76 percent recorded in December 2018, while the rural index also rose by 0.71 percent in January 2019, down by 0.01 percent from the rate recorded in December 2018 (0.72) percent.

“The corresponding twelve-month year-on-year average percentage change for the urban index is 12.20 percent in January 2019. This is less than 12.51 percent reported in December 2018, while the corresponding rural inflation rate in January 2019 is 11.46 percent compared to 11.75 percent recorded in December 2018.”

Commenting, FDC analysts attributed the decline in January inflation to three factors namely lower consumer spending, lower statutory allocation to the three tiers of government and increased liquidity mop efforts of the CBN through sale of OMO bills.

They stated: “Typically, consumers spend less on food in January due to the fall in disposable income after the Christmas celebrations and essentials such as the payment of school bills are deducted. Other inflation moderating factors include: higher OMO sales and lower Federation Accounts Allocation Committee, FAAC, disbursements.

“As part of its mopping up strategy, the CBN issued more OMO bills (N2.38 trillion) in January, than the previous month (N1.81trn). The new issues (N2.38 trillion) were in excess of the maturing bills by 12.18 percent. This led to a sharp fall in the average opening position of the banking system to N77.7 billion from N136.05 billion in the previous month.”

They, however, projected that higher election spending and slow down in business activities will undermine efforts of the apex bank to sustain this trend in February.

They stated: “Higher election spending in February as well as the slowdown in business activities as a result of security concerns would exacerbate inflationary pressures in the month. However, the CBN’s commitment to mop up excess liquidity could artificially suppress this pressure. Hence, we are expecting a modest increase in inflation in February.”


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