The rate at which banks lend short term funds to each other in need of cash rose sharply weekend as a result of Central Bank of Nigeria mop up exercise that took lots of cash off bank vaults.
The more than quadrupling of the rate came after the CBN sold a total of N167.60 billion in treasury bills on Friday and withdrew an undisclosed amount from banks in open market operation to maintain cash reserve ratio. It did so to support the local currency thus making the Naira scarcer in the market and more attractive to hold.
Demand also strengthens the currency, helping fight inflation.
Inflation rate is at the moment running at more than 16 per cent annually while the country’s economy, hit by the low oil price has been in recession over the past year.
The Naira, meanwhile, has weakened from around N200 to the U.S. dollar in mid-2016 to nearly N364 on Friday — a 45 per cent decline in value.
The central bank’s sales on Friday amounted to N167.16 billion of 356-day open market operation treasury bills at 18.55 per cent, and N439.45 million of the 188-day paper at 17.95 per cent.
The total banking credit balance opened at N75 billion. But outflows from the system led the market into negative territory, traders said. “We see the cost of borrowing rising further as the market struggle with tight liquidity and banks seek to cover their positions,” one trader said.
