Friday, February 14, 2020 /09:34
AM / By FDC / Header Image Credit: Pinterest
OMO activities remain the CBN's main tool in regulating system wide liquidity. In October 2019, the CBN prohibited local corporate and retail investors from purchasing Open Market Operations (OMO) bills at both the primary and secondary markets. This was aimed at curbing regulatory arbitrage as banks exploit the MPR's +200bps/-500bps asymmetric window. OMO sales fell by 41.43% to N849.31billion in November 2019 from N1.45trillion in October 2019.
The immediate impact of this was a switch in investment portfolio to the capital market (equities) from the money market, leading to an increase in demand for liquid (banking) stocks and a crash in Treasury bill rates. The stock market All Share Index gained 2.45% while T/bill rates declined by an average of 157 basis points in November. However, the CBN's unorthodox policies, especially the LDR increase, have boosted system wide liquidity in the last few months. Currency in circulation rose by 6.80% to N2.20trillion in November from N2.06trillion in October. In line with the CBN's tight monetary stance, excess liquidity was mopped up through OMO auctions. In January, OMO sales increased by 19.38% to N1.54trillion from N1.29trillion in December.
Impact of CRR debits
The MPC, at its last meeting, increased the cash reserves ratio (CRR) of banks by 500 basis points to 27.5% in a bid to curtail inflationary pressures. Headline inflation increased for four consecutive months to 11.98% in December 2019. The resulting impact of the CRR hike was a marginal increase in the Treasury bill rates to 3.5%p.a., 4.5%p.a. and 6.5%p.a. for the 91-day, 182-day and 364-day tenors respectively. The stock market All Share Index (ASI) also lost 2.65% to close at 28,843.53 on January 31st .
Outlook - What will PFAs do with their funds?
OMO bills account for approximately 23% of pension fund administrators' asset portfolio. As these OMO bills mature, most of the investors that are barred from purchasing OMO bills would seek new investment outlets including forex and equities. This could trigger currency weakness as investors shift to the forex market. However, the recent decline in the stock market performance and the marginal increase in T/bill rates due to the CRR hike could imply that investment in T/bill will increase. Meanwhile, only international investors with certificates of capital importation are allowed to purchase T/Bills. Hence, money market liquidity will most likely increase and could stoke inflationary pressures.