Yields on Nigeria’s benchmark 20-year bond rose 55 basis points to 12.7 percent in early Wednesday trade after the central bank unexpectedly tightened monetary policy to curb inflation after cutting interest rates only four months ago, traders said.
The central bank on Tuesday raised its benchmark rate to 12 percent from 11 percent and the cash reserve ratio for commercial banks to 22.5 percent from 20 percent, Governor Godwin Emefiele said. It held the liquidity ratio at 30 percent.
“The MPC has signaled a tightening and rates have gone up. Lenders can place their funds with the central bank at 7 percent so why buy treasury bills at lower yields?” one trader said.
There were no early deals on the interbank overnight lending market on Wednesday as lenders were asking for 10 percent to place funds with peers, a jump from Tuesday’s 4.8 percent before the central bank rate decision.
Bond yields rose on average above 40 basis points across maturities, traders said, adding that the central bank was withdrawing liquidity from the banking system to enforce the new cash reserve rules and it was also selling treasury bills.
Emefiele attributed the rate hike to the state of the economy and rising annual inflation, which hit 11.4 percent in February, a 3-1/2-year high and well above the central bank’s target band of 6 to 9 percent.
Africa’s biggest economy is going through its worst economic crisis in years due to a slump in crude prices which has weakened its currency and slashed government revenue. Oil exports account for around 70 percent of national income.
Emefiele said the central bank would keep the naira exchange rate stable despite sharp falls in the currency on the parallel market due to a shortage of dollars.
The 10-year bond yield rose 45 basis points to 12.65 percent while the 5-year most liquid paper climbed 41 basis points to 11.7 percent, traders said.
Traders estimate the central bank will withdraw between 350 billion to 400 billion naira on Thursday to enforce new cash reserve rules for lenders.
It will also sell 114.97 billion naira in treasury bills on Wednesday to further drain liquidity.