Nigeria's interbank overnight lending rate fell to a five-year low on Thursday, hit by excess liquidity in the market that spurred renewed bond buying from commercial lenders and pension funds, traders said.
According to Reuters, the overnight lending rate halved to 1 percent from the previous day. It had hovered around a three-month low of 3 percent last week after the central bank repaid matured open market bills and did not issue fresh ones to mop up the funds, in a bid to keep borrowing costs low.
The regulator has been injecting cash into the banking system in a bid to ease liquidity and stave off recession in Africa's biggest economy, which has suffered as oil prices fell.
"The problem with allowing excess liquidity to drive interbank rates lower is that it calls into question the effectiveness of the monetary policy rate," said Razia Khan, head of Africa research at Standard Chartered Bank
Last month liquidity dried up as authorities ordered commercial lenders to move government deposits into a single account at the central bank, part of an anti-graft drive.
The central bank then lowered cash reserve requirements for lenders to 25 percent from 31 percent in a bid to loosen monetary policy but left its benchmark interest rates on hold at 13 percent.
Analysts doubted the excess cash will trickle down to businesses by way of lending as commercial banks look to the bond market for yield.
Yields on the 10-year bond fell 71 basis points on Thursday to 13.59 percent while the seven-year bond shed 77 basis points to 13.31 percent as the excess liquidity filtered through.
"Most banks will likely still take their guidance from the policy rate in order to set loan rates. Unless interbank rates are sustained at these extremely weak levels ... it is unlikely that we will get a real economy lending spurt on the back of this," Khan said.
Banking system credit opened at 1.05 trillion naira ($5.3 billion) on Thursday, traders said. The regulator on Wednesday refunded 740.80 billion naira withdrawn from lenders before the cut in cash reserve requirement.