Interest rates on key Nigerian financial instruments remain above 17 per cent despite the Central Bank of Nigeria’s September decision to cut its benchmark rate by 350-basis points, indicating that the policy easing has yet to translate into a sustained decline in market yields.
The CBN reduced the Monetary Policy Rate from 26.5 per cent to 23 per cent, but yields on its Open Market Operations bills and Federal Government bonds remain relatively high, offering banks continued opportunities to earn substantial returns on their investments.
At the October 22 OMO auction, the apex bank allotted N2.628 trillion in bills against an initial offer of N2 trillion. The 138-day instrument cleared at 17.63 per cent, while the 180-day bill recorded a stop rate of 17.14 per cent.
Both yields increased from the comparable rates recorded at the October 6 auction, when the 147-day bill cleared at 17.22 per cent and the 182-day instrument at 16.92 per cent.
The latest results suggest that the decline in OMO yields following the September policy adjustment has paused, although one auction alone is insufficient to establish a sustained upward interest-rate trend.
Banks also continue to earn 20 per cent on excess funds placed at the CBN’s Standing Deposit Facility under the revised monetary policy corridor. The Cash Reserve Requirement for deposit money banks remains at 45 per cent.
Government bonds are offering similar returns. Nigeria’s benchmark 10-year bond yield rose to 17.05 per cent in the week ended October 16, while bonds maturing in September 2036 and June 2038 cleared at 17.29 per cent and 17.19 per cent, respectively, at the October 19 auction.
These returns could cushion banks against some of the immediate effects of the benchmark rate reduction on interest income from newly acquired securities.
However, the eventual impact on banks’ earnings will depend on how quickly lending rates, deposit costs and yields on existing and new investments adjust to the lower policy rate.
While cheaper funding and stronger demand for loans could support banks’ performance, persistently high market yields indicate that the monetary easing has not yet produced a corresponding broad-based decline in returns across the financial system.
