Interest rates to rise as CBN sell record N1 trillion in Wednesday’s Treasury Bill auction

Recent developments suggest a potential rise in Nigeria’s interest rates for the upcoming treasury bills auction, indicating the Central Bank of Nigeria’s (CBN) shift towards a tighter monetary policy.

This is just as the apex bank is set to raise a record N1 trillion on February 7, 2024, a record high  according to historical CBN data.

Insights from sources involved in forex reforms at the CBN have indicated to Nairametrics that the Monetary Policy Committee (MPC) is contemplating an increase in rates by 100 to 300 basis points in their forthcoming meeting.

This aligns with a Bloomberg report, which anticipates a rate hike of approximately 500 basis points.

Treasury Bills auction to top N1 trillion, yields to rise

The initiation of this shift in monetary policy is expected to be evident in the CBN’s bi-weekly treasury bills auction scheduled for Wednesday, February 7th, 2024.

The auction is anticipated to offer interest rates higher than usual, alongside an increased volume of treasury bills.

A Meristem research report also pointed to a likely increase in interest rates citing the increasing need for the government to borrow.

“While we highlight that the market liquidity as of the 5th of January remains significantly lower relative to the amount on offer, we expect the decision of the CBN to halt discretionary cash reserve debits from the banks to improve the subscription level at the auction. Furthermore, the offer of NGN1trn suggests a heightened need for FG to raise funds from the local debt market, which could prompt investors to demand higher yields. Overall, we expect a significant increase in rates across the trio instruments.”

Data from most recent auctions

In a recent auction held in January, the CBN sold treasury bills totaling N381.2 billion across various maturities: 91, 182, and 364 days.

The interest rates for these maturities were recorded at 5% for the 91-day bills, 7.15% for the 182-day bills, and 11.54% for the 364-day bills, respectively.

The forthcoming auction on Wednesday is poised to mark a significant escalation in the volume of treasury bills, with about N1 trillion up for auction.

This includes N600 billion allocated for the 364-day bills, and N200 billion each for the 182-day and 91-day bills.

According to Nairalytics data, the N600 billion earmarked for the 364-day tenure represents an unprecedented figure, and the cumulative N1 trillion sale is unparalleled, with records dating back to 2001.

To put this into context, a total of N1.2 trillion was sold in the fourth quarter of 2023.

Nigeria’s money supply stood at over N78 trillion as of December 2023, a factor many analysts attribute to the nation’s accelerating inflation.

The surge in inflation is also perceived as a key driver behind the depreciating exchange rate.

Despite the increase in money supply, Nigeria’s output growth has remained sluggish, exacerbating pressure on the exchange rate.

What this means?

This strategic adjustment in monetary policy, demonstrated by the projected increase in treasury bill interest rates and auction volumes, reflects the CBN’s response to the multifaceted economic challenges facing Nigeria.

By tightening monetary policy through higher interest rates and larger treasury bill auctions, the CBN aims to curb inflation and stabilize the exchange rate, thereby fostering a more balanced economic environment.

The decision to significantly raise the volume of treasury bills auctioned, especially for the 364-day tenure, underscores the CBN’s commitment to addressing the liquidity surplus in the economy.

By absorbing excess liquidity, the CBN endeavors to counter inflationary pressures and support the naira’s value, which is crucial for economic stability and growth.

Cardoso’s comments

To address the situation, the central bank revealed short-term measures aimed at attracting forex inflows which include raising rates and removing the capital controls imposed on supplies. CBN Governor, Yemi Cardoso also highlighted these strategies in his recent TV interview.

“In the short term, we have put in significant work, and we are witnessing results in improving the market structures and removing all the bottlenecks stifling the supply of FX into the country.”

“We have addressed the challenges to remittance flows, reduced the ability of banks to hold on to positions, and more importantly, we now have the export proceeds from the national energy sector flowing back through the Central Bank. We have also initiated several short-term measures to make naira assets attractive to foreign investors”

The CBN Governor also admitted that exchange rate stability will be achieved when the inflation rate is under control, growth is returned and an increase in exports is achieved.

“The eventual stability of the Naira will be driven by our ability to address the fundamental issues affecting our economy…bring inflation under control and promote the growth of Nigerian businesses such that we eventually export much more than we consume as a nation.”

Optics: As stakeholders and market participants await the outcomes of the CBN’s monetary policy adjustments, the broader implications for Nigeria’s economy remain a subject of keen interest.

The effectiveness of these measures in curbing inflation and stabilizing the exchange rate will be critical in shaping the country’s economic trajectory in the coming months.

Meanwhile, a quick check of secondary market trades for treasury bills indicates the market closed bearish as the average yield increased by 2.06% to settle at 11.91%. There were reported sell-offs across all tenors as bears took over the naira fixed-income market