The Central Bank of Nigeria (CBN) has withdrawn N300 billion from the banking system to support the naira, which has been hit by falling oil prices.
The development made the overnight rate to spike to 30 per cent on Friday, up from 12 per cent last week.
This was as overnight lending rate more than doubled to a record high of 70 per cent on Monday, amid a cash squeeze after the apex bank soaked up naira liquidity to support the ailing currency, dealers said.
CBN is struggling to prop up the naira, which has taken a hit over the past few months as falling oil prices shook confidence in the assets of Africa’s leading energy producer. Oil hit a five-year low on Monday.
“Banks are scrambling for funds to cover their positions,” a dealer tells Sunnewsonline.
The naira eased 1.1 per cent on Monday, below the central bank’s new target since an 8 per cent devaluation two weeks ago to save declining foreign reserves, despite the bank selling dollars onto the market.
“The tighter monetary policy – higher cash reserve requirement as well as higher policy rate – will filter through to the real economy via an increased cost of borrowing,” said Melissa Verreynne of NKC Independent Economists, adding that the spike in overnight rates was likely to be shortlived.
The central bank, which is trying to curb naira liquidity, recently hiked banks’ cash reserve ratio for holding private sector bank deposits to 20 per cent, from 15 per cent previously.
The bank also raised its benchmark interest rates by one percentage point to 13 per cent and devalued the naira by eight per cent, as it sought to stem losses to its foreign reserves from defending the currency against weaker oil prices.
The deposit brings total sterilised private sector funds to N1.47 trillion, which is 9.72 per cent of total banking deposits and 8.87 per cent of money supply. The total private sector deposits now stand at N7.38 trillion.
A consultancy firm, Financial Derivatives Company (FDC) Limited, said the additional CRR was expected to push up interbank rates by about 200 basis points in the short term.
Its Managing Director, Bismarck Rewane, said: “Borrowing costs will rise and banking sector profitability is set to take a hit as net interest margins diminish further.”
A comparison of core regulations across key banking systems in sub-Saharan Africa revealed that the banks operate under some of the toughest regulations, which have led to decline in earnings.