CBN offers N2trn OMO bills as banks park over N6trn at deposit window

The Central Bank of Nigeria offered N2 trillion in open market operations bills on Thursday, October 22, seeking to mop up liquidity as commercial banks continued to park more than N6 trillion at its standing deposit facility.

The auction was split into two equal tranches: N1 trillion in 138-day bills maturing on March 9, 2027, and N1 trillion in 180-day bills maturing on April 20, 2027. Bidding ran from 1:00pm to 1:30pm, according to the auction notice. The offer was equivalent to 96.8 per cent of the N2.067 trillion in Federal Government securities expected to mature this week, leaving a net repayment gap of about N67 billion.

The operation is the central bank’s latest attempt to manage excess naira liquidity without changing its policy rate. The monetary policy committee cut the benchmark rate by 350 basis points to 23 per cent in September, but kept the cash reserve requirement at 45 per cent for commercial banks. That combination has left banks with large pools of cash that cannot easily be lent.

Why banks are using the deposit window

Banks’ net placements at the standing deposit facility exceeded N6 trillion after the central bank repaid N2.41 trillion in maturing OMO bills on October 13. The repayment injected liquidity into the banking system, and rather than lending it aggressively, banks deposited much of it back at the CBN.

By October 16, the standing deposit facility had absorbed N6.083 trillion, according to Nairametrics. Banking-system liquidity rose 69.39 per cent week on week to N6.283 trillion in the same period. The figures show a financial system flush with cash but short of attractive lending opportunities.

That is not a healthy equilibrium. When banks prefer to earn a low return at the central bank rather than lend to businesses and households, credit growth suffers. The CBN’s OMO auctions are designed to drain some of that cash and force banks to compete for funds, but the scale of the liquidity suggests the problem is persistent.

The October 6 auction set the tone

The current operation follows a larger-than-expected OMO sale on October 6. The CBN offered N2 trillion but allotted N3.31 trillion after receiving N3.51 trillion in subscriptions. The stop rates were 17.22 per cent for the 138-day bill and 16.92 per cent for the 180-day bill.

The oversubscription showed strong demand for high-yielding short-term paper. Banks were willing to lock up funds for six months at rates well above inflation, which stood at 14.63 per cent in September. That is a comfortable real return for a regulated institution with a low cost of funds.

The central bank’s willingness to allot more than it offered was significant. It signalled that the CBN wanted to withdraw liquidity more aggressively than the advertised amount suggested. The move helped stabilise the naira and slow the pace of money-supply growth, but it also raised the cost of bank funding.

September’s heavy sterilisation

The October auctions are part of a broader pattern. In September, the CBN sold N17.51 trillion in OMO bills against N10.89 trillion in maturities, resulting in a net withdrawal of N6.62 trillion from the banking system. That was one of the largest monthly sterilisation efforts in recent years.

The scale reflects the central bank’s concern about excess liquidity. Broad money supply has risen above N146 trillion, and credit to the government has expanded rapidly. If that liquidity is not managed, it could feed inflation, pressure the naira and undermine the central bank’s credibility.

But heavy sterilisation has costs. It raises the interest bill on OMO bills, which is borne by the central bank and ultimately by the public sector. It also crowds out private-sector credit, because banks can earn attractive returns by lending to the CBN instead of financing businesses.

The policy dilemma

The CBN faces a difficult trade-off. If it drains too much liquidity, it risks choking off credit and slowing economic growth. If it drains too little, it risks inflation and currency instability. The optimal level of liquidity is not obvious, particularly in an economy where structural constraints limit the supply of creditworthy borrowers.

The monetary policy rate of 23 per cent is high in nominal terms, but it is only about eight percentage points above inflation. That is a modest real rate by Nigeria’s historical standards. The cash reserve requirement of 45 per cent is a more powerful tool, because it directly reduces the funds available for lending.

Some analysts argue that the CBN should rely more on the policy rate and less on quantitative tools. Others say the cash reserve requirement is necessary to control money creation in a system where banks have limited lending opportunities. The debate matters because the mix of tools affects different sectors unevenly.

What the auction will reveal

The October 22 auction will show whether banks remain willing to absorb large volumes of OMO bills at current rates. A strong subscription with stop rates close to the previous auction would suggest that liquidity remains abundant and that the CBN’s sterilisation strategy is working.

A weak subscription or a sharp rise in stop rates would signal that banks are becoming more cautious. That could happen if they need cash to meet liquidity ratios, if they expect higher yields later or if they are worried about the naira. In that case, the CBN might need to offer higher rates to achieve its liquidity target.

The overnight money-market rate will provide an immediate signal. It rose four basis points to 20.34 per cent on Wednesday, while the open repo rate and the Nigerian Overnight Financing Rate held at 20.00 per cent. A further increase would indicate that liquidity is tightening, even as the headline system balance remains large.

The bigger picture

The OMO auction is a technical operation, but it carries a broader message. Nigeria’s banking system is liquid, profitable and cautious. Banks are not short of cash; they are short of confidence in the private sector’s ability to repay. That is a structural problem that monetary policy alone cannot solve.

Until credit demand recovers, the CBN will remain caught between the need to control inflation and the risk of starving the economy of credit. The N2 trillion OMO offer is a temporary tool, not a permanent solution. Its success should be judged by whether it supports price stability without further damaging the flow of credit to productive sectors.

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