In pursuant of its pro economic growth monetary policy the Central Bank of Nigeria, CBN, increased its net liquidity injection into the interbank money market by 110 per cent to N770 billion in the first quarter of the year, Q1’22, from N367 billion in the fourth quarter of last year, Q4’21.
As part of its money supply management tools, the CBN sells Open Market Operations, OMO, treasury bills to mop up liquidity (idle cash) from the banking system.
To reduce money supply, the apex bank ensures volume of OMO treasury bills sales is higher than volume of matured OMO bills to be repaid and this results in net liquidity outflow from the banking system, and the concomitant effect of raising cost of funds in the interbank money market.
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But to increase money supply, the CBN ensures the volume of OMO bills sales is lower than matured OMO bills to be repaid and this results in net liquidity inflow into the banking system and fall in cost of funds.
Financial Vanguard analysis of Q1’22 OMO auction results showed that the CBN sold N520 billion worth of OMO bills during the quarter, representing 140 per cent quarter-on-quarter, QoQ, increase from N216 billion worth of OMO bills sold in Q4’21.
Similarly, the amount of matured OMO bills repaid during the quarter rose to N1.289 trillion in Q1’22, representing a 121 per cent, QoQ, increase from N583 billion worth of matured OMO bills repaid in Q4’21.
This resulted in net liquidity inflow of N770 billion in the interbank money market in Q1’22, representing 110 per cent increase from N367 billion in Q4’21.
This development induced steady fall in cost of funds in the interbank money market, with interest rate on Interbank Call lending dropping by 4.33 percentage points to 5.67 per cent last week Friday from 10 per cent at the end of December last year.
The above development is driven by the decision of the CBN to maintain its pro economic growth monetary policy which among other things focuses on stimulating lending to the economy.
