By Ademola Alawiye with agency report  

Monday, 31 Jan 2011

Following the increase of the Monetary Policy Rate by the Monetary Policy Committee of the Central Bank of Nigeria, inter-bank lending rates rose as liquidity dropped in the market.

The inter-bank rates rose to an average of five per cent last week from 4.92 per cent after the MPC decision.

According to Reuters, traders said the market might borrow from the CBN this week if liquidity fell further due to outflows for foreign exchange purchases and other transactions.

The MPC had lifted the MPR by 25 basis points to 6.5 per cent on Tuesday and took aggressive measures to tighten liquidity as it sought to get inflation down to single digits.

The MPR is the rate at which the CBN lends to Deposit Money Banks.

The Secured Open Buy Back rose to 4.75 per cent, 175 basis points lower than the CBN’s 6.50 per cent benchmark rate and 25 basis points above the Standing Deposit Facility rate, from 4.50 per cent last week.

Both overnight and call money were unchanged at five per cent and 5.25 per cent respectively.

Dealers said, “As part of measures to tighten liquidity, the CBN sold N60bn in treasury bills on the secondary market on Friday, while foreign exchange purchases also drained some cash from the system. We have yet to see the full impact of the hike in MPR in the market due to the payment of public sector salaries during the week, but we expect rates to rise next week.”

The CBN raised the cash reserve requirement for lenders to two per cent from one per cent and liquidity ratio to 30 per cent from 25 per cent on Tuesday in its bid to curb inflation by reducing banks’ capacity to boost liquidity.

A trader, who craved anonymity, said, “The rate hike and other requirements will impact on the quantum of cash available for banks to transact other business and this could cause cost of borrowing among banks to rise further.”

Source: Punch