Interbank rates seen elevated despite N958bn expected inflows

Short-term interbank rates are expected to remain elevated in the week ahead, as tight liquidity conditions persist in Nigeria’s money market despite anticipated inflows of nearly ₦1 trillion from maturing government securities.

Market analysts said pressure on system liquidity continues to stem from increased activity at the Standing Lending Facilities (SLF) of the Central Bank of Nigeria (CBN), where banks have been actively borrowing to cover shortfalls. This has kept overnight lending rates high, underscoring the liquidity squeeze confronting the banking sector.

Traders noted that overnight (O/N) and Open Buy Back (OBB) rates, which closed the previous week at double-digit levels, are unlikely to ease substantially in the immediate term. “The tight stance of the CBN has continued to keep funding costs elevated, even in periods when maturities are due,” one Lagos-based dealer told reporters.

The central bank has maintained a cautious approach in managing liquidity, frequently conducting mop-up operations to control inflation and stabilise the naira. This has forced banks to rely more heavily on the SLF window to meet short-term funding needs, further driving up interbank rates.

However, relief may be on the horizon. Analysts from Cowry Assets Management Limited project that about ₦600 billion worth of Open Market Operation (OMO) bills will mature during the week, alongside an additional ₦358 billion in Treasury bills. The combined ₦958 billion liquidity injection is expected to provide breathing space for banks, even if only temporarily.

“System liquidity should improve mid-week as the expected maturities hit the system. The size of these inflows is significant enough to lower borrowing pressure, but overall rates will still reflect the central bank’s tight policy stance,” investment firm Commercio Partners said in a note to clients.

Money market investors will also be closely watching the CBN’s next round of auctions. Depending on stop rates, part of the maturing funds may be recycled back into government securities, tempering the net effect on liquidity. In recent weeks, the apex bank has offered attractive yields on both OMO and T-bills, drawing strong investor demand from both local and offshore participants.

At the same time, the elevated interbank rates are feeding into higher yields at the short end of the curve, with the one-year Treasury bill closing last week at around 20 percent. Analysts said yield levels may remain attractive for investors seeking inflation-beating returns, especially as headline inflation continues to hover above 21 percent.

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In the days ahead, market participants expect volatility to persist, with funding rates fluctuating in response to inflows, auctions, and CBN interventions. While the expected maturities should provide temporary relief, the broader liquidity outlook remains tight.

“Liquidity injections will ease pressure somewhat, but the market is still operating under a restrictive regime. Until the CBN signals a shift in stance, interbank rates will likely stay elevated relative to historical averages,” said a fixed-income strategist at a Lagos investment bank.

For borrowers, the persistence of high short-term rates underscores the higher cost of credit in the economy, while investors in fixed-income assets may continue to benefit from strong yields at the short end.