The Central Bank of Nigeria (CBN) has reported a notable increase in banks’ deposits, reaching a record N3.42 trillion by the end of last week. This marks a significant rise in deposits at the CBN, driven by recent monetary policy adjustments.
The surge in deposits follows the CBN’s announcement of new terms for its Standing Deposit Facility (SDF) and Standing Lending Facility (SLF). The SDF rate was raised to 25.75%, with the SLF adjusted to 31.75%. Additionally, the monetary policy rate (MPR) was increased by 50 basis points to 26.75% from 26.25%. The new asymmetric corridor for the SDF is now +500/-100 basis points, up from the previous +100/-300 basis points.
These changes are intended to discourage banks from accumulating excessive liquidity at the central bank and to encourage increased lending. By adjusting these rates, the CBN aims to influence the cost of funds for banks, which will, in turn, affect the interest rates on loans and deposits.
At the close of last week, the total deposits with the CBN reached N3.42 trillion, the highest recorded figure for August. The previous three weeks had seen combined deposits of N3.57 trillion. Notably, banks deposited approximately N1.09 trillion on the day following the announcement of the new policy rates.
According to a circular from the CBN’s Financial Markets Department, deposits up to N3 billion will earn interest at 25.75%, while amounts exceeding this threshold will attract a lower rate of 19% for commercial and merchant banks. Payment service banks will also receive 25.75% on deposits up to N1.5 billion, with amounts above this threshold earning 19%.
The CBN’s move is designed to curb excess liquidity, which has been linked to rising inflation. The central bank has previously noted that excess cash in circulation contributed to inflationary pressures. As of July 2024, currency in circulation had reached an unprecedented N4.05 trillion.
Additionally, banks had borrowed over N3.02 trillion from the CBN by the end of August through the Standing Lending Facility, a short-term lending option for daily operational needs.
Afrinvest, in its monthly market report, highlighted that the CBN’s new policy could impact the banking sector’s liquidity dynamics. The firm projected that the reduction in interest rates on excess deposits above N3 billion could lead to lower theoretical floors for Treasury bills, assuming other factors remain constant. They also expect inflows of approximately N1.2 trillion from maturing Treasury bills and government bond coupons to further enhance liquidity.
These developments underscore the CBN’s ongoing efforts to manage monetary policy and stabilize the financial sector amid changing economic conditions.
