Liquidity conditions to tighten further as banks borrow N73.6trn in 7 months
Central Bank of Nigeria’s Monetary Policy Committee (MPC) tinkering of the asymmetric corridor is expected to tighten liquidity conditions, putting pressure on funding cost for banks, analysts at Afrinvest have said.
Already, the banks have accessed a total of N73.6 trillion through the Standing Lending Facility (SLF) between January and July 19 this year.
“Our take is that MPC’s tinkering of the asymmetric corridor to further tighten liquidity conditions should exert pressure on funding cost for banks, both directly (as lenders tap the window) and indirectly.
“We note the particular importance of the Standing Lending Facility (SLF) as a support for banks amid liquidity crunch induced by contractionary interest rate policy. For example, between the start of the year and 19th July 2024, banks accessed a total of N73.6 trillion through the SLF, 8.4x inflows to the Standing Deposit Facility (SDF). This skewness suggests a steep liquidity shortfall within the system, for which lenders must now pay 31.75 per cent per annum to bridge if the SLF must be utilized”, said Afrinvest.
They believe that elsewhere businesses might continue to strain under the weight of elevated borrowing costs — a necessary evil to starve decades-high inflation. The analysts believe that the view that Monetary Policy Rate (MPR) as a tool has its limitations in addressing structural issues, like insecurity and weak availability of infrastructure to support productivity, amongst other things.
“The increase in MPR is expected to lead to an upward repricing of fixed income instruments, especially short-term assets, ranging from treasury bills to commercial papers which will naturally make these investments more attractive to investors compared to stocks,” they said.
The MPC last week raised the benchmark interest rate by 50bps to 26.75 per cent, – fourth consecutive hike this year (YTD cumulative increase 800bps). Additionally, the MPC adjusted the asymmetric corridor around the MPR to +500/-100bps, from +100/-300bps. Meanwhile, the Cash Reserve Ratio was held constant (DMBs 45.0%; Merchant Banks: 14.0%) with the Liquidity Ratio unchanged at 30.0%.
The decision of the CBN’s MPC contrasted its African peers for example, Kenya’s MPC held rate constant at 13.0% in June while South Africa (8.25 per cent) and Egypt (27.75 per cent) maintained the status quo in their July meeting.
For Nigeria, the decision to hike rate followed an uptrend in Headline inflation, for the 18th consecutive month, to 34.2 per cent. Although supply pressure on food and energy goods were the main drivers of the continued price pressure, the MPC noted that previous hikes had curbed aggregate demand, hence the need to consolidate on that front by maintaining a hawkish stand.
