Banks Borrow N8.71trn In Two Months As CBN Mops Up Liquidity
Amid severe macroeconomy challenges and mopping up of liquidity by the Central Bank of Nigeria (CBN), Nigerian banks have borrowed a sum of N8.71 trillion from the apex bank between January and February 2024.
The N8.71 trillion borrowed by banks in 2024 is an increase of 787.3 per cent from N981.86 billion borrowed in 2023 and InsideBusiness Online further gathered that banks in January borrowed N2.75trilliion which increased by 117.3 per cent to N5.97triillion in February 2024.
Analysts however traced the increasing borrowings by banks from the CBN to dwindling Naira at the foreign exchange market, coupled with a rising inflation rate and mopping up liquidity. Naira as of February 2024 traded at N1,544.081 against the dollar. In February 2023 however, the Naira traded at N460.47 to a dollar.
Banks can access lending from the apex bank using the Standing Lending Facility (SLF) window and deposit cash with the apex bank using the Standing Deposit Facility window (SDF). The CBN provides the SLF, a short-term lending window for banks and merchant banks, to access liquidity to run their day-to-day business operations.
It would be recalled that the Monetary Policy Committee (MPC) of the CBN at its meeting last week unanimously narrowed the asymmetric corridor from +100/-300 to +100/-700 basis points around the Monetary Policy Rate (MPR) and Policy Committee (MPC) of the CBN raising the MPR significantly by 400 basis points to 22.75 percent at its first meeting in 2024, higher than our expectation of 150 basis points.
The increase therefore brought the MPR to its highest level ever – 22.75 per cent, and a measure it considered would ensure price stability and manage inflation in the near term.
Furthermore, the committee voted to increase the Cash Reserve Requirement (CRR) to 45.0 per cent from previously: 32.5 per cent and retained the Liquidity ratio at 30 per cent, reinforcing the apex bank’s consistent hawkish monetary policy stance which it has employed since May 2022 to tackle the rising inflation rate (29.90 percent as of January 2024) amid mopping up liquidity in the financial system.
Analysts at Cordros Research explained that the CBN’s move in the money market is to increase interest rates and the use of orthodox monetary tools to manage liquidity already indicated the institution’s maintenance of a tight monetary policy stance.
“Therefore, we stated that the MPC would retain this position at its meeting, raising the policy rate further. Whilst our prognosis was for an increase in the MPR by 150 basis points, the MPC surprisingly raised the benchmark rate by a whopping 400 basis points.
“We attribute the aggressive rate hike to the need to manage inflation expectations, which have been primarily stoked by the constant depreciation of the naira and the low credibility of the institution in maintaining price stability.
“Furthermore, we had expected that the CBN would hold other parameters constant; however, in line with the CBN’s goal to extensively mop up excess liquidity, the committee raised the CRR to 45per cent, 125basis higher than the previous rate of 32.50per cent, widened the asymmetric corridor to +100basis points/-700 basis points (previously: +100basis points/-300basis points), whilst retaining the liquidity ratio at 30per cent.
“The committee also noted the global upside risk to domestic inflation, including the trade disruption stemming from the heightened geopolitical tensions. In line with our expectations, the MPC projects that central banks in advanced economies will retain high policy rates whilst global financial conditions remain tight.
“In the short term, we expect that central banks in advanced economies will keep rates steady due to existing risks to inflation. Nevertheless, we hold the view that global inflation will maintain its deceleration path in the coming months due to declining energy prices and a higher base effect from the previous year.
“Conversely, domestic prices are projected to stay high due to the depreciation of the naira exchange rate, elevated cost of energy products and reduced food supply induced by heightened insecurity in the food-producing middle-belt region. The just concluded MPC meeting mirrors the committee’s zero tolerance for further inflation increases and highlights the need to enforce price stability, which, in their view, supports output growth in the medium to long term.”
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