CBN Just Crashed Interbank Rates To A 3 Year low With This New Rule

Nigeria’s interbank lending rates slipped to a three-year low after the central bank announced a restriction on the volume of idle cash that banks can place with it, traders said.

The new rule

The central bank on Thursday restricted lenders and discount houses from depositing more than 7.5 billion naira ($45.25 million) each, increasing interbank naira liquidity.

Any amount deposited above the stipulated 7.5 billion naira by each bank will not attract any interest payment, the new rule specified.

The effect

Interbank lending rates closed around 8 percent across the board on Friday, 2.2 percentage points lower than last week’s 10.2 percent.

Dealers said many banks were taken aback by the new limit on central bank deposits and were willing to place funds with borrowers at whatever rate.

“Many banks are left with idle funds that should ordinarily be attracting some interest at the central bank, but now are floating with zero interest,” one dealer said

The cash balance banks held at the central bank opened around 500 billion naira on Friday. The new restrictions meant more than 60 percent of those funds were not earning interest.

The regulator currently pays on 10 percent of cash deposited with it by banks.

Both Open Buy Back (OBB) and overnight placement with other banks were traded around 8 percent each on Friday, lower than 10.15 percent and 10.25 percent for OBB and overnight last week.

How long can it last

Dealers said interbank lending rates are expected to rise back to around 10 percent next week as banks adjust their lending to the new central bank rule.

Source: Reuters

https://af.reuters.com/article/nigeriaNews/idAFL6N0SX3TS20141107