COST OF FUNDS TO FALL AS N1.1TR BOOST INTERBANK MARKET

Cost of funds is expected to fall this week in the interbank money market in response to inflow of N1.05 trillion from maturing treasury bills (TBs).

Last week, cost of funds rose sharply above 20 percent following aggressive liquidity mop up by the Central Bank of Nigeria (CBN) in response to liquidity inflow of N1.47 trillion. 

The liquidity inflow comprised statutory allocation funds of N788.14 billion and N684.84 billion from matured TBs.

To mop up the huge liquidity injection, the CBN conducted Open Market Operations (OMO) from Monday to Thursday where it offered N1.6 trillion OMO TBs. The offers were however undersubscribed with total public subscription at N935.3 billion while the CBN sold N932.7 billion.

As a result, short term interest rate rose sharply by over 800 basis points (bpts). Data from the FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 776 btpts to 24.33 percent on Friday from 16.57 percent the previous week. Similarly, interest rate on Overnight lending rose by 872 bpts to 26.08 percent last week Friday from 17.36 percent the previous week.

Analysts at Lagos based Cowry Assets Management Limited and Afrinvest Limited projected that the expected inflow of N1.05 trillion billion will lead to downward moderation in cost of funds this week. In the coming week, OMO of N498.7 billion and T-bills of N551.4 billion maturities are expected to hit the system and as a result, we believe the CBN will sustain the bout of mop ups.

Nevertheless, we expect subscription rates to continue to lag as investors take advantage of more attractive rates at the secondary market. We also anticipate that money market rates will remain within a single digit band, said Afrinvest analysts.

(Vanguard)