In July, the Central Bank of Nigeria (CBN) drained N7.2 trillion in liquidity from the banking system through a combination of open market operations (OMO) and short-term repo transactions, according to data compiled from the bank's money market auctions. But a closer look at the monthly numbers reveals a quiet evolution in how the CBN executes its monetary policy: the share of repo transactions increased sharply compared to earlier months, marking a strategic shift in its playbook.
The development reflects the central bank's effort to manage excess Naira liquidity without permanently altering the structure of the financial sector. Market participants say the CBN's preference for repo operations over traditional OMO stem sales is a more flexible, reversible tool that allows liquidity to be withdrawn for short periods and injected back later if needed.
A Quiet Shift in Instrument Mix
The N7.2 trillion mop-up in July represents a substantial increase from the monthly average of about N5.3 trillion recorded in the first half of the year. However, the composition of that mop-up has changed. In June, OMO bills accounted for roughly 70% of the total liquidity removed, while repos accounted for the rest. In July, the share of repos jumped to nearly 45%, and in many auction sessions, repo transactions were the dominant tool.
This shift is more than just a technical adjustment. It has implications for the cost of borrowing in the interbank market, the profitability of banks, and the transmission of monetary policy to the real economy. When the CBN uses repos, it absorbs reserves for a defined period, typically ranging from one to 30 days, and pays interest at the policy rate or a corridor around it. OMO bills, by contrast, are longer-term instruments that lock up liquidity for 90 to 180 days or more.
Why Repos Are Gaining Favour
Central bank officials have not made any formal announcement about a change in strategy, but market analysts point to several reasons for the quiet switch:
- First, the repo market allows the CBN to fine-tune liquidity on a day-to-day basis, which is necessary when banking system reserves are volatile.
- Second, repos reduce the federal government's cost of debt service, because the CBN no longer needs to issue large volumes of high-yielding OMO bills that compete with government securities.
- Third, and perhaps most importantly, repos enable the CBN to reverse its actions quickly if the economy needs stimulus.
The flexibility is particularly valuable as the fiscal authority ramps up spending and the CBN seeks to strike a balance between price stability and growth support. It also lessens the risk of distorting the bond market, since OMO bills are often used by banks as proxies for government bonds.
Impact on Money Market and Banks
The operational change did not go unnoticed in the interbank market. The unsecured overnight interbank rate, which averaged 6.8% in June, rose to an average of 9.5% in July, according to data from the FMDQ. On several trading days, the rate spiked above 15% as banks grappled with liquidity shortfalls.
Banks responded by increasing their reliance on the CBN's Standing Lending Facility, which provides overnight funds at the upper corridor of the monetary policy rate. At the same time, lenders with surplus liquidity became more aggressive in the repo market, offering funds at rates slightly above the CBN's own repo rate.
The changed playbook also affected the CBN's balance sheet. In July, the central bank's holdings of government securities in its investment portfolio increased, while its OMO bill stock declined. The net effect was a marginal reduction in the average maturity of the CBN's liquidity absorption, a phenomenon that some analysts view as a deliberate effort to improve the transmission of policy rate changes to the broader financial system.
Outlook for Monetary Policy
Looking ahead, the CBN is likely to continue mixing repos with OMO bills, depending on the liquidity conditions and the evolution of inflation. The Monetary Policy Committee, at its July meeting, held the policy rate at 24% but signaled that it would act decisively if inflation pressures resurged. The shift towards repos does not imply a looser stance; rather, it gives the central bank more levers to pull in either direction.
Some market participants worry that the reliance on repos could mask underlying structural liquidity. Because repos are short-term, banks know the injections are temporary, and they may not adjust their long-term lending behavior accordingly. Others argue that repos actually improve policy transmission because they influence the entire yield curve through the repo rate.
Regardless of the interpretation, the July numbers confirm that the CBN is quietly altering its playbook. The N7.2 trillion mop-up, achieved with a more flexible mix, underscores the central bank's determination to keep inflation anchored while supporting a fragile economic recovery. In the coming months, all eyes will be on whether this new strategy becomes the norm or simply a tactical adjustment.
