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Despite the Central Bank of Nigeria’s (CBN) sustained monetary tightening, primarily through aggressive Open Market Operations (OMO), banking system liquidity remained in surplus territory, underscoring the resilience of market liquidity conditions amid ongoing policy adjustments.
System liquidity refers to the availability of liquid assets, particularly cash and central bank reserves, within the banking sector. It determines the ease with which banks and financial institutions can meet short-term obligations, extend credit, invest, or settle transactions. While tighter monetary policy typically aims to reduce liquidity in the system to combat inflation and stabilise the currency, recent data shows that overall liquidity levels remained positive, although volatile.
According to Coronation Merchant Bank’s latest market report, banking system liquidity opened last week on a strong footing at N1.02 trillion, rebounding from a prior deficit of N94.56 billion. However, conditions tightened sharply by week’s end, closing at a deficit of N609.43 billion, a direct result of a sizeable OMO auction conducted on Thursday, which absorbed significant liquidity from the system.
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This shift was reflected in the Central Bank’s liquidity management windows. Banks’ placements with the CBN via the Standing Deposit Facility (SDF) declined from N923.68 billion at the beginning of the week to N539.12 billion, indicating reduced excess liquidity. Meanwhile, borrowing through the Standing Lending Facility (SLF) surged from N179.08 billion to N821.50 billion, as banks sought short-term funding amid tightened conditions.
Despite this late-week strain, average system liquidity still improved significantly, rising to N366.94 billion compared to N62.94 billion the week before.
CBN’s sustained use of OMO as a tightening tool has been one of the most aggressive in recent years. According to FBNQuest, total OMO bill sales skyrocketed to N13.5 trillion in 2024, a dramatic increase from N723 billion in 2023. Notably, during a single auction on November 11, 2024, the apex bank sold over N1.4 trillion in 365-day OMO bills nearly double the total for the entire preceding year.
One of the CBN’s key motivations for ramping up OMO issuance was to attract foreign portfolio inflows (FPIs) and enhance FX liquidity. Elevated OMO yields, which peaked at 24.4 percent in September 2024, created highly favorable conditions for carry trades, particularly in comparison to U.S. Treasury yields.
Despite aggressive tightening in 2024, average system liquidity remained in surplus territory, averaging around N248.5 billion in the first half of the year, according to Norrenberger, a Nigerian integrated financial services group.
In 2025, the CBN has shifted to a more measured monetary policy stance, holding interest rates steady through the first half of the year. This transition toward a more orthodox and predictable policy approach follows the cumulative 875 basis points hike in the Monetary Policy Rate (MPR) in 2024, which was aimed at curbing inflation, stabilising the naira, and improving investor sentiment.
The policy moderation coincides with early signs of macroeconomic improvement. Nigeria’s headline inflation declined for the fourth consecutive month, easing from 22.22 percent in June to 21.88 percent in July 2025. While the deceleration of 0.34 percent is modest, it signals growing traction in disinflation efforts.
Commenting on the July figures, Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), noted that while progress in curbing headline and core inflation is encouraging, persistent food inflation and monthly price pressures point to deeper structural weaknesses in the economy. He emphasised the need for a coordinated mix of monetary, fiscal, and structural reforms to consolidate recent gains.
According to analysts at Norrenberger, if inflation continues to moderate, the CBN may soon consider a more accommodative policy stance to support domestic economic growth, particularly in the non-oil sectors, where activity remains sluggish. Lower interest rates could reduce borrowing costs, stimulate consumption, and incentivise private sector investment at a time when credit access is still constrained.
United Capital Plc also projects a further decline in inflation to 21.77 percent in July, reinforcing expectations that the CBN might explore a rate cut in its September 2025 Monetary Policy Committee (MPC) meeting. Such a move could unlock opportunities for fixed income investors, increase corporate borrowing in the capital markets, and support continued FX rate stability, which is expected to hover around N1,510–N1,530/$1.
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At its last MPC meeting held in July 2025, the CBN decided to maintain its current monetary policy stance, keeping all key policy parameters unchanged. The MPR was retained at 27.50 percent, with the asymmetric corridor left at +500/-100 basis points. The Cash Reserve Ratio (CRR) was also held steady at 50.00 percent for Deposit Money Banks and 16.00 percent for Merchant Banks, while the Liquidity Ratio remained unchanged at 30.00 percent.
Olayemi Cardoso, governor of the CBN, explained that the decision was driven by the need to sustain the ongoing momentum in disinflation and to contain existing and emerging price pressures. He emphasized that maintaining the current policy stance is necessary to continue addressing inflationary challenges. The MPC, he added, will continue to conduct a rigorous assessment of economic conditions, price developments, and the broader outlook to guide future policy actions.
