Rates at the interbank market are expected to spike this week as liquidity is mopped from the financial system through bond and Treasury Bills sales by both the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN).
A total of N252.43 billion is expected to be mopped from the system as the CBN auctions Treasury Bills worth N142.43 billion and DMO raises N110 billion through bond sales. Market operators said they project that money market rates will trend northward as the demand for primary market instruments expected to be auctioned by the CBN and DMO weigh on financial system liquidity.
Last week, activities in the Treasury Bills market were mixed as investors sold off on shorter dated T-bills instruments. Consequently, average yields trended higher on three out of five sessions. The impact of the debit for penultimate Friday’s OMO auctions weighed on system liquidity at the beginning of last week, leading to a 25bps increase in average yield as investors sold off particularly in the T-bills instruments maturing in February and March 2017.
Buying interest however returned to the market on Wednesday and Thursday before the trend was reversed on Friday, eventually closing the week at 16.1 per cent, up 83bps rise week on week. Analysts at Afrinvest said they believe investors may be liquidating their positions in anticipation TBills primary market auction (PMA).
“At the PMA, the CBN will be auctioning N32.4bn of the 91-day, N30.0bn of the 182-day and N80.0bn of the 364 day instruments. We expect that investors will subscribe to the longer dated instruments in expectation of a medium to long term moderation in yield environment.
DMO said it plans to raise N45 billion each through the 5-year 14.5 per cent July 2021 bond and the 20-year 12.4 per cent March 2036 bond. It will also auction the 10-year 12.5 per cent January 2026 to raise N20 billion.
Meanwhile, having maintained a rising trend in the past 11 months an inflation figure for January is expected to rise further to between 18.6 and 18.7 per cent from 18.55 per cent in December 2016. According to analysts at Afrinvest, FSDH Merchant Bank and Financial Derivatives Company, inflation figure is expected to inch higher in January.
To Afrinvest analysts, inflation is expected to rise to 18.7 per cent “due to a relatively lower base despite projected slower month-on-month change to 1.0 per cent from 1.1 per cent in December 2016 as the impact of yuletide season on prices wears off.”
FDC analysts on their part, linked the expected inflation rise to factors including seasonality effects, supply shocks and exchange rate pass through effects through export smuggling. “Christmas festive spending contributed to a surge in demand at the end of 2016, albeit marginal in magnitude when compared to previous years.
“As January approached the seasonal slur in economic activities and lower purchasing power (due to payment of tuition and post Christmas blues) kicked in. Hence, a paltry increase of 0.05 per cent in the Year-on-Year rate in January.
“Power supply, distribution and logistics costs were a major challenge for manufacturers. Diesel prices skyrocketed to an average of N270 per liter from N140 per liter in the same period the previous year. Power supply from the grid dropped sharply to 2500 MW in January leading to higher distribution and logistics costs. The Producer Purchasing index (PPI), the major ingredient of core inflation is likely to remain high.”
If all variables remain unchanged analysts project that headline inflation will begin to ease from February 2017 due to high base in the corresponding period. Although prices may edge higher if the naira further depreciates as the feedback effect on energy (petrol and Diesel) prices may fuel further hike in general price level.”