How liquidity squeeze stabilises rates, by Renaissance Capital

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How liquidity squeeze stabilises rates, by Renaissance Capital

...other analysts link success of reduction in SDR to creation of AMCThe current reluctance of banks to lend to the real sector, occasioned by dearth of funds in the system may have inadvertently stabilised the liquidity situation, according to experts at the leading investment banking firm, Renaissance Capital. In an apparent reference to decisions taken at the Monetary Policy Committee (MPC) meeting in Abuja, where Sanusi Lamido Sanusi, Central Bank of Nigeria (CBN) governor, announced some measures to unlock the credit market, the experts observed that although the monetary aggregate has been under pressure, money market rates have improved. Consequently, the 90-day inter-bank offer rate (NIBOR) placed on funds made available by banks to be traded among themselves, which has been hovering above 12 percent has declined to 11.7 percent which mirrors CBN's inter-bank market that it guarantees. According to Renaissance, the above scenario means that "systemic liquidity has improved apparently in recent months, despite the banks' reluctance to lend to the real economy." The experts further said that data released by the National Bureau of Statistics (NBS) suggest a drop in broad money growth to 11.9 percent, year-on-year (YoY) in January due to fall in net foreign assets and downturn in credit to the private sector, leading to the sector's marginal increase to 17.7 percent YoY, January this year, after recording growth of 26.0 percent in December, last year, and 25.3 percent in November. "On the upside, money market rates have incrementally eased, with the average call rate reaching 2.3 percent in January 2010 from 2.89 percent at year end 2009 and 5.25 percent in November 2009, and the secured buy-back rate further retreated to 2.30 percent from 2.64 percent and 4.53 percent, respectively",  Renaissance Capital said. However, MPC on Tuesday reduced the standing deposit rate to one percent from the earlier 2 percent to discourage banks from keeping money with CBN, but rather lend it to the productive sectors of the economy, while leaving the Monetary Policy Rate (MPR) at 6 percent and standing lending rate flat at 6 percent, meaning the MPR plus 200 basis points. However, other analysts said on Wednesday that the reduction in standing deposit rate to one percent, which aims at propelling banks towards new risk-asset creation, is dependent on timely creation of the Asset Management Company (AMC) to absorb banks' toxic assets.

Source: Businessday :: News you can trust

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