CBN leaves N2.87tn in banking system as liquidity mop-up slows

By Chibuzor Alli

Nigeria’s banking system recorded a significant liquidity boost in October as the Central Bank of Nigeria (CBN) scaled back its withdrawal of excess funds through Open Market Operations (OMO), allowing about N2.87tn to remain in the financial system.

The shift followed a sharp reversal in the apex bank’s liquidity management strategy, with fresh OMO sales falling below the value of securities that matured during the month.

Data from the Financial Markets Dealers Association (FMDA) showed that the CBN allotted N6.182tn in new OMO bills in October, against N9.051tn in maturing securities, resulting in a net repayment of approximately N2.87tn before other liquidity movements.

The development contrasted sharply with September, when the central bank withdrew N6.62tn from the system after selling N17.51tn in OMO securities against maturities of N10.89tn.

The reduced mop-up was reflected in banking system liquidity, which climbed by 56.75 per cent to N7.373tn in October, compared with N4.703tn recorded in the preceding month.

According to the FMDA’s October market report, the increase was also supported by government disbursements and repayments on maturing securities, which boosted banks’ cash positions.

The central bank’s softer approach became more noticeable towards the end of October, particularly during its final OMO auction, when it reduced the volume of securities allotted.

Attention is now shifting to November, with the financial system expected to receive another wave of inflows. The FMDA projected N13.79tn from maturing securities and government payments during the month.

However, the projected inflows may not translate into a lasting liquidity surplus, as the CBN could withdraw part of the funds through fresh OMO auctions.

How much of the additional cash remains with banks will largely depend on the central bank’s appetite for further liquidity absorption and the volume of securities it offers to investors.

The changing liquidity conditions could also influence activity in the fixed-income market, as banks and other investors may have more funds available for Treasury bills and other short-term instruments.

A sustained reduction in OMO sales could leave excess funds circulating in the system, potentially putting downward pressure on short-term money market yields.

Despite the liquidity expansion, the Nigeria Overnight Financing Rate remained unchanged at 20 per cent in October, while the overnight rate edged down by five basis points to 20.38 per cent.

The Monetary Policy Rate also remained at 23 per cent, following the CBN’s September decision to reduce it by 350 basis points.

The FMDA, however, urged banks to maintain adequate liquidity buffers, warning that the central bank could still deploy OMO auctions to absorb excess funds and manage liquidity conditions.