Money Market Rates Dip as FAAC Credit Boosts Liquidity

Money market short term benchmark interest rates declined as Federal Accounts Allocation Committee (FAAC) disbursement boosted liquidity level in the financial system last week.

The liquidity in the system started the week with a surplus balance on Wednesday, mainly due to the early disbursement of FAAC inflows, AIICO Capital Limited said in its market update.

Big banks with excess cash were noted to demand for higher rates on their spare funds. The lenders, the Tier-1, pumped funds into the Central Bank of Nigeria’s (CBN) standing deposit facility (SDF).

The system was boosted by about N600 billion FAAC credits, FGN bond coupon payments worth N29.84 billion and OMO bill maturities totaling N15.00 billion, according to Cordros Capital Limited.

However, analysts noted that financial system liquidity decreased to a negative balance on Thursday because of OMO auction funding amounting to approximately ₦986.88 billion.

Due to flood of inflows into the system, liquidity improved again on Friday ahead of Debt Management Auction scheduled for June 24, 2024.

The robust liquidity level in the system was supported by coupon inflows from 2033 FGN bond, 2038 FGN notes, and 2053 FGN papers. In total, system liquidity opened at ₦712.07 billion Friday, compared to the -₦132.75 billion reported last Friday.

Cowry Asset Limited reported that the Nigerian interbank offered rate (NIBOR) increased by 143 basis points to reach 26.54%, reflecting insufficient liquidity level, despite FAAC inflow.

Data from FMDQ Securities platform revealed that the open repo rate decreased by 38 bps to 25.25% last week, and the overnight lending rate declined by 21 bps to 26.04% compared to the previous week.

“Interbank rates are expected to stay elevated next week, as FGN bond and Nigerian Treasury bills auctions should drain liquidity, in the absence of any significant inflows”. AIICO Capital Limited predicted.

Cordros Capital Limited noted that local deposit money banks that accessed the CBN’s standing deposit facility (SDF) window caused the week’s average system liquidity to close at a net short position of N563.87 billion versus net long position of N684.11 billion in the prior week.

“We envisage the funding for next week’s June 2024 FGN bond PMA and a possible net issuance at the NTB auction would mount pressure on the financial system, more so as no notable inflows are expected”, the firm said. 

On that note, analysts said they expect funding rates to trend higher in the coming week. #Money Market Rates Dip as FAAC Credit Boosts Liquidity

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