Nigeria’s Banks Swim in Cash After Sharp Rate Cut, Testing Inflation Fight

Nigeria's central bank recently executed a significant 3.5-point interest rate cut, leading to a surge in cash flowing back into the country's banks. This development comes as the nation battles inflation, despite having maintained high interest rates for two years. The Central Bank of Nigeria (CBN) lowered the benchmark rate from 26.5% to 23% on Tuesday, September 22, signaling a shift in its monetary policy stance.

According to financial news site Nairametrics, banks currently hold N5.98 trillion (approximately US$4.5 billion) in spare cash, up from N2.86 trillion (around US$2.2 billion) the previous week. A substantial portion of this increase is attributed to the CBN itself, which saw N2.3 trillion (about US$1.7 billion) in short-term bills mature and get repaid on September 22. Furthermore, over N7 trillion (about US$5.3 billion) are parked at the CBN's Standing Deposit Facility during the week.

The CBN manages the money supply through Open Market Operations (OMO), which involves selling short-term bills to banks and investors. These bills eventually mature and return the cash to the banking system. The policy goal is to prevent an excess of naira from driving prices up or weakening the currency. However, as bill maturities approach, the cash returns to banks, which face restrictions on how much they can lend due to the 45% cash reserve requirement.

Analysts were taken aback by the magnitude of the rate cut, with Governor Olayemi Cardoso describing it as a "reset and recalibration" rather than a switch to easier money. He noted that the gap between the official rate and the market rate had weakened the impact of the policy. The Monetary Policy Committee (MPC) kept the cash reserve requirement at 45% and set the overnight deposit rate at 20%.

Inflation eased slightly to 15.39% in August from 15.43% in July, according to the National Bureau of Statistics (NBS). Following the rate cut decision, the CBN's OMO auction on September 24 saw 152-day bills clearing at 17.29% and 180-day bills at 16.99%. The auction saw bids exceeding the amount offered, indicating strong demand for the bills. Similarly, the Treasury bill auction by the Debt Management Office (DMO) saw the 91-day bill clearing at 15.50% and the 364-day bill at 15.89%.