Nigerian overnight interbank lending rate rose sharply to five percent on Thursday, its highest since October, after the central bank drained naira liquidity through sales of (OMO) treasury bills, traders said.
There was no official comment on the sudden rate rise, but higher rates could support the naira. The government, fighting intense pressure on the currency from the collapse in prices for Nigeria’s oil exports, has pegged the currency at around 198 per dollar on the official interbank market.
The market closed at 3.5 percent for overnight borrowing among commercial lenders on Wednesday. The interbank rate had closed consistently at 1 percent in the last three months due to improved liquidity in the banking system.
Ratings agency Standard & Poor’s reiterated on Thursday that Nigeria, Africa’s largest economy and biggest oil exporter, will have to devalue its currency, saying it expected this to happen at some stage in 2016 and in gradual adjustments.
Traders said the central bank sold about 161 billion naira ($810 million) in open market operations bills on Wednesday, draining cash from the banking system.
“There is an acute shortage of liquidity in the market and many banks were scrambling for cash to cover their positions, causing the cost of borrowing to shot up,” one dealer said.
The banking credit balance was put at 220 billion naira ($1.11 billion) as at Wednesday, but with the sale of 85.8 billion naira in local currency denominated bonds on Thursday and fresh injection of cash through maturing treasury bills, the rate could rise further on Friday, traders said.
Nigeria’s interbank rate mirrors the level of naira cash liquidity in the banking system. ($1 = 198.8000 naira)