Finance
CBN tightens liquidity to fight inflation, interbank deficit hits N4.1tn
By: Amarachi Okonkwo
The Central Bank of Nigeria has intensified its monetary tightening campaign, pushing the interbank system into a deficit of N4.1 trillion as it moves aggressively to rein in rising inflation and stabilise the naira.
The latest Afrinvest Weekly Market and Economic Analysis shows that liquidity conditions in the banking system remain firmly in negative territory, reflecting a deliberate strategy by the apex bank to withdraw excess cash from circulation. Although the average system deficit narrowed by 18.7 per cent from N5.0 trillion in the previous week, analysts say the shortfall underscores the regulator’s commitment to tightening financial conditions.
Liquidity squeeze deepens
According to the report, the persistent liquidity crunch is driven largely by sustained Open Market Operations (OMO) and limited inflows into the system. By offering N600 billion worth of high-yield OMO bills, the CBN effectively sterilised excess liquidity, locking funds away from the banking system to curb inflationary pressures.
Afrinvest analysts noted that the liquidity drought is a central component of the bank’s broader monetary defence strategy. The move is aimed at reducing the volume of naira chasing limited foreign exchange, a dynamic that has historically fuelled exchange rate volatility.
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Despite the tight conditions, investor appetite for government securities remains strong. The 140-day and seven-day OMO bills recorded significant oversubscriptions, with bid-to-cover ratios of 8.6x and 4.3x, respectively. This, analysts say, highlights continued demand for high-yield instruments even amid constrained liquidity.
Banking sector fragmentation persists
The report also points to growing liquidity segmentation within the banking sector, where a handful of large institutions hold substantial surplus funds while smaller banks grapple with funding shortages.
Rather than lend in the interbank market, many of the cash-rich banks are opting to deposit their excess funds with the CBN. Standing Deposit Facility placements averaged N4.1 trillion during the period, signalling persistent risk aversion and limited interbank trust.
This fragmentation has contributed to a paradox where the system remains in deficit overall, yet significant funds are still parked with the apex bank.
Rates hold steady despite pressure
In spite of the liquidity squeeze, interbank funding rates have remained relatively stable, suggesting that the market has largely adjusted to the high-interest-rate environment.
The Open Repo rate held steady at 22.0 per cent, while the Overnight rate eased slightly to 22.3 per cent. Analysts interpret this as evidence that the CBN’s hawkish stance has been fully priced in by market participants.
Inflation concerns drive policy stance
The tightening comes against the backdrop of renewed inflationary pressure. After nearly a year of easing, Nigeria’s headline inflation rose to 15.4 per cent in March 2026, driven primarily by a global energy shock that pushed crude oil prices above $100 per barrel, increasing domestic fuel and transportation costs.
By maintaining tight liquidity conditions, the CBN aims to anchor inflation expectations and support the naira. While the policy stance raises borrowing costs and constrains credit expansion, policymakers appear willing to accept short-term financial strain in exchange for longer-term macroeconomic stability.
Looking ahead, analysts expect liquidity conditions to remain constrained in the near term, with funding rates staying elevated but stable under the current policy framework.
The CBN’s strategy signals a clear priority: containing inflation and defending the currency, even at the cost of tighter financial conditions. For banks and businesses, this means navigating a high-rate environment where access to liquidity remains limited, but predictable.
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