Money market rates fell on Wednesday as increased liquidity in the banking system drove down short-term borrowing costs.
The decline came after the Central Bank of Nigeria cut its policy rate by 350 basis points to 23 per cent and lowered the standing deposit facility floor to 20 per cent.
According to AIICO Capital Limited, the overnight policy rate dropped by one percentage point to 21 per cent, while the overnight lending rate fell by 51 basis points to 21.76 per cent.
The average Treasury bill rate also declined to 18.38 per cent.
Banking system liquidity increased by 7.92 per cent, rising from N6.91tn to N7.45tn and marking the fourth straight weekly increase. Since the start of the year, liquidity has risen by 95.30 per cent.
The rise was driven partly by a N2.27tn inflow from matured Open Market Operation bills, as well as increased use of the Standing Deposit Facility, which reached N7.34tn.
The liquidity expansion occurred alongside strong participation by banks in the midweek Treasury bills auction, where subscriptions surpassed N4.2tn, compared with allotments of less than N500bn.
Nigerian Interbank Offered Rates also reflected the improved liquidity position, with the overnight rate declining by 123 basis points to 20.93 per cent.
The Open Repo rate fell by 100 basis points to 21 per cent, while the overnight rate in the money market declined by 51 basis points to 21.76 per cent, according to market data.
Treasury bills equally attracted strong demand in the secondary market, resulting in lower yields across different maturities.
AIICO Capital reported that the average T-bill yield declined by 43 basis points to 18.38 per cent.
Analysts expect short-term interest rates to remain under downward pressure while excess liquidity persists within the banking system.
AIICO Capital projected that overnight rates could move closer to the 20 per cent deposit facility floor, given the N7.45tn liquidity surplus.
However, market participants noted that the size of the next OMO auction would play a key role in determining the pace at which the excess liquidity is absorbed.
The settlement of the latest Nigerian Treasury bills auction is also expected to have only a modest impact on the liquidity surplus, as the amount allotted was substantially lower than the total subscriptions received.