Interbank Rate Rise on Cash Flow to Bond Purchases

Nigeria's overnight interbank rate rose on Friday to around 4.5 percent from 3.5 percent last week, after commercial lenders made payments for local currency denominated bond purchases, which drained liquidity in the system.

Nigeria sold about 170 billion naira ($855.13 million) in long-tenor local currency bonds on Wednesday, while payment for the debt was due on Friday. The central bank also sold about 63.98 billion naira of 7-month treasury bills at 9 percent on Thursday to further curtail excess liquidity in the banking system.

However, 91.42 billion naira in matured treasury bills was retired on Thursday, resulting in net cash inflow of 27.44 billion naira into the system.

Traders said liquidity level stood around 414 billion naira on Thursday, compared with 401.7 billion naira last Friday, but the level is expected to have dropped after the payment for bonds and possible debit for cash reserves ratio (CRR) on Friday.

"We see further rise in the cost of borrowing among banks next week because of expected cash flows to treasury bills and forex purchases, while there would be no major cash inflow into the system," one dealer said.

Commercial lenders are expected to make provision for foreign exchange purchases by Tuesday, which will further drain liquidity from the system and push up interbank interest rate, traders said.