April 27, 2020 / 5:27 PM / a month ago

Nigerian overnight rates drop after $3.9 bln liquidity squeeze

ABUJA, April 27 (Reuters) - Nigerian overnight rates dropped 20 percentage points on Monday as traders hoped the central bank will boost liquidity to ease a cash squeeze after withdrawing 1.4 trillion naira ($3.9 billion) from lenders to try to support the currency.

Overnight rates fell to 15% from a high of 35% on Friday after the central bank collected excess cash holdings from banks as part of measures to lift the naira.

Money market rates had been 2% before the withdrawal.

Traders said the central bank refunded some of the cash on Monday, helping to lower rates and fuelling hopes of an extra liquidity injection coupled with a coupon payment.

The banking regulator has been withdrawing excess monies from the banks to tighten liquidity especially before currency auctions to support the naira, which it devalued last month.

The central bank took out liquidity from lenders two weeks ago but later returned some of the cash, traders said, a system it has used to manage forex demand to conserve its reserves, which are down 25% from a year ago.

In January, the central bank raised the cash reserve ratio that banks must hold by 500 basis points to 27.5%, the first rise in four years to curb excess liquidity in the banking system, which it said was contributing to inflation.

Overnight repurchase deals rose to 48.44 billion naira on Monday from 4.7 billion naira in the previous session, and banks borrowed a total of 94.16 billion naira from the central bank to cushion the impact of the liquidity squeeze.

Bonds rallied on Monday due to coupon payments but treasury bills traded flat with no deals.

The naira has been hitting new lows on the over-the-counter spot and black markets since last month after the central bank adjusted its official rate, implying a 15% devaluation, to absorb the impact of an oil price crash triggered by the coronavirus pandemic.

The naira was quoted at 450 on the black market on Monday, weaker than the 388.76 it traded at on the spot market.

In October, the central bank levied a charge of more than 400 billion naira on 12 lenders for failing to increase loans to meet a regulatory target. ($1 = 360.00 naira) (Reporting by Chijioke Ohuocha Editing by Mark Heinrich)

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