Nigeria’s Interbank Market Flooded With Cash as CBN Tightens Liquidity to Curb Inflation, Naira Pressure

• Despite a surge in market liquidity last week, the Central Bank of Nigeria (CBN) maintained an aggressive liquidity mop-up to curb inflation and stabilize the naira exchange rate, with banks channeling up to ₦2 trillion to the Standing Deposit Facility window.

Nigeria’s interbank money market remained liquidity-heavy last week, but the Central Bank of Nigeria (CBN) intensified its liquidity mop-up operations to maintain a tight monetary stance, aimed at taming inflation, stabilising the naira, and curbing speculative activity.

The policy aligns with the apex bank’s ongoing monetary tightening cycle, which seeks to manage short-term liquidity fluctuations and discourage unproductive lending amid elevated interest rates.

Banks Park ₦2 Trillion in CBN’s SDF Window

Despite huge inflows from maturing securities, deposit money banks (DMBs) redirected an estimated ₦1.5 trillion to ₦2 trillion into the Standing Deposit Facility (SDF) — the CBN’s liquidity absorption tool — according to market sources.

The SDF window allows banks and discount houses to park their excess cash overnight with the CBN and earn interest. The strong preference for this facility underscores both the cash-rich position of banks and their cautious lending behaviour amid tight monetary conditions.

Liquidity Tightens Despite Huge Inflows

The money market opened the week with a liquidity balance of ₦50.12 trillion, supported by ₦250 billion in OMO maturities and ₦230.66 billion in Treasury bill maturities. However, as the CBN stepped up liquidity control, system liquidity tapered to ₦3.39 trillion by week’s end — the fourth consecutive week of negative net liquidity.

Analysts attributed the decline to increased activity at the SDF window, where returns of 24.5% (MPR less 250bps) offered a better yield compared to long-term Treasury bills, which are currently below 20%. This yield gap encouraged banks to prefer SDF placements, reducing interbank lending and reinforcing CBN’s grip on short-term funds.

Interest Rates Stay Elevated But Stable

Despite the liquidity tightening, short-term borrowing rates remained broadly stable.

• The Overnight Nigerian Interbank Offered Rate (NIBOR) eased slightly by 2bps to 24.86%.
• One-month and three-month tenors each dipped by 1bp, while the six-month rate dropped by 18bps, showing mild relief in short-term funding.
• The Overnight (OVN) interbank rate held steady at 25.0%, up by 8bps week-on-week.

OMO and Treasury Auctions Oversubscribed

At the OMO auction, the CBN offered ₦600 billion, but investors submitted bids worth ₦4.4 trillion, signaling robust demand. Eventually, ₦3 trillion was allotted, with stop rates clearing at 19.45% (168-day) and 19.49% (196-day) papers — reinforcing the apex bank’s tight stance.

Similarly, at the Nigerian Treasury Bills (NTB) auction held on October 8, 2025, the CBN offered ₦570 billion but received ₦1.06 trillion in subscriptions. Demand was strongest at the 364-day tenor, which absorbed ₦986.33 billion and cleared at 15.77%, down 130bps from the previous week. Shorter tenors — 91-day (15.00%) and 182-day (15.25%) — attracted relatively muted interest.

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Analysts Predict Sustained Tightening by CBN

Market analysts expect liquidity to remain positive in the short term due to upcoming OMO maturities and bond coupon inflows, but believe the CBN will sustain its sterilization drive to curb inflationary pressures and maintain interest rate stability.

One analyst told The Sun,

“The CBN is likely to continue open market operations to absorb excess liquidity. SDF placements are expected to remain above ₦1.5 trillion daily, while the Overnight rate should hover between 24.5% and 25.5%, maintaining a balanced money market stance.”

In a note to investors, Cordros Research said:

“In the absence of fresh CBN mop-ups next week, liquidity should remain strong, aided by ₦37.09 billion in FGN bond coupon inflows. We expect the OVN rate to hold close to current levels.”

Similarly, analysts at Afrinvest noted:

“The market continues to reflect a fine balance between liquidity management and yield positioning. With gradual naira stability and a slightly dovish CBN tone, investors are shifting toward longer-dated instruments for better real returns.”