Interbank Rate Eases amid Drop in Liquidity

Nigeria's overnight interbank rate eased on Friday to around 3.5 percent from 5 percent last week, even though liquidity in the system fell as banks set aside cash for reserves and to pay interest on deposits.

"We consider market liquidity sufficient at the present level to support transactions and this accounts for the drop in cost of borrowing among banks," one dealer said.

Traders said liquidity dropped from around 564.35 billion naira ($2.84 billion) last week to about 401.7 billion naira on Friday due to premium payments to the Nigerian Deposit Insurance Corporation (NDIC) and cash reserves ratio (CRR) debits on Thursday.

"The market is comfortable with the level of liquidity in the market, because many fund placers are not ready to keep their idle funds with the central bank," another trader said.

This is the second consecutive week that the interbank rate has dropped, even though the central bank raised its benchmark interest rate from 11 to 12 percent last month, and the cash reserve ratio for commercial banks to 22.5 percent from 20 percent, to try to curb inflation.

Traders said rates are seen at the same level next week because treasury bills worth about 91 billion naira are due to mature on Thursday and unused cash deposited for foreign exchange purchases will be refunded.