Nigeria’s overnight lending rate spiked to 30 percent on Friday while the naira stabilised, after the central bank drained liquidity from the banking system as part of efforts to support the currency, hit by falling global oil prices.
The central bank withdrew around 300 billion naira ($1.7 bln) from the system this week to reinforce monetary tightening introduced last week, pushing the interbank overnight lending rate up to 30 percent, from 12 percent a week ago, dealers said.
The central bank is struggling to prop up the naira, which has taken a beating over the past few months as falling oil prices have shaken confidence in the assets of Africa’s leading energy producer.
As the bank has been forced to tighten monetary policy to defend the currency, it also risks hurting Africa’s biggest economy as high interbank rates will constrain credit growth and could create bad loan problems for lenders.
The central bank devalued the naira by 8 percent in a one-off move last week to stem a decline in its foreign exchange reserves but the currency has traded below the bank’s new target band since the devaluation.
The bank also last week increased banks’ cash reserve ratio for holding private sector bank deposits to 20 percent, from 15 percent, and raised interest rates by 100 basis points to 13 percent, the first change in more than two years, as part of efforts to defend the currency.
On Friday, the naira closed at 180.1 to the dollar, the same level as its previous close, after the central bank sold dollars on the interbank market to prop it up. The naira was still below the bank’s new target band of 160-176 to the dollar.
The balance that lenders hold with the central bank closed at a debit of 45 billion naira on Friday, after being about 400 billion naira in credit a week ago.
“Lending rates rose sharply this week because there were no new (bills) maturing, while increased funding for foreign exchange purchases from the central bank depleted liquidity,” one dealer said.
The central bank had debited 568 billion naira from the banking system immediately after it increased banks’ cash reserve ratio last week. This week’s withdrawal was the usual monthly debt to enforce the new cash reserve requirement, dealers said.
The overnight lending rate, the secured open buyback (OBB), at 30 percent is 17 percentage points higher than the central bank’s benchmark rate of 13 percent.
Dealers expect lending rates to remain high into next week until a 150 billion naira treasury bill matures on Thursday.
Source : BusinessDay