Nigerian commercial banks deposited a net N51.5 trillion with the Central Bank of Nigeria (CBN) through the Standing Deposit Facility (SDF) in January 2026, preferring risk-free returns over lending to the real sector amid heightened economic uncertainty.

Only last Friday, system liquidity opened Fat N4.32 trillion (up from N2.57 trillion the prior week), driven by an increase of over N4.26 trillion in the sSDF on Friday, alongside a couple of primary market repayments (a total of N154.80 billion) and OMO bill (N993.10 million) instruments that matured during the week.

The development underscores the depth of liquidity in the financial system, despite the CBN’s tight monetary stance, as excess cash continues to flow into short-term instruments and deposit windows rather than being directed towards productive credit expansion.

Analysts said the surge in SDF activity reflects a liquidity paradox in the banking system, where huge funds are available. Still, risk aversion remains high due to concerns about asset quality and volatility in the business environment.

The heavy placements came months after the CBN adjusted its interest rate corridor in November 2025, reducing the SDF rate from 24.50 percent to 22.50 percent, a move expected to discourage banks from keeping excess funds with the apex bank and encourage increased lending to businesses and households.

However, data from investment firm, CardinalStone, showed that liquidity conditions in early 2026 remained exceptionally strong, driven largely by maturing Open Market Operation (OMO) bills and coupon payments.

In its February 11 fixed income report led by analyst Olaolu Boboye, CardinalStone estimated that the system recorded a liquidity surplus of about N5.6 trillion in January alone, describing the cash inflow as a “tidal wave” that has reshaped market behaviour.

The report noted that the massive liquidity has created a divergence in Nigeria’s yield curve, as short-term interest rates continue to decline on the back of excess cash, while long-term yields trend upward due to increased government borrowing.

According to the firm, the Federal Government net-issued about N1.3 trillion in January to fund its 2026 budget deficit, putting upward pressure on longer-dated instruments.

Market analysts said the trend has triggered a “flight to yield”, with investors aggressively positioning to lock in higher returns before a possible policy pivot toward easing later in the year.

The liquidity-driven demand was also evident at the February 4, 2026 Nigerian Treasury Bills (NTB) auction, where total subscriptions rose to N4.59 trillion, nearly four times the amount offered.

The 364-day bill dominated investor interest, attracting about N4.39 trillion, as market participants sought to secure yields above 20 percent amid expectations that rates may moderate in coming months.

Despite the liquidity expansion, interbank funding conditions remained relatively stable, with the Open Buy Back Rate (OPR) and Overnight Rate (OVN) hovering around 22.5 percent to 22.7 percent, supported by the high volume of cash circulating within the system.

Beyond the debt market, the liquidity overflow also supported improved activity in the foreign exchange market, particularly through the OMO segment.

CardinalStone reported that the FX market recorded a single-day turnover of over $2.7 billion on January 27, 2026, driven by sustained foreign portfolio investment (FPI) inflows.

The report added that average monthly FX trading value stood at $584.9 million in January, while the increased supply of dollars helped the naira strengthen by 2.7 percent, closing the month at N1,391/$1.

Analysts attributed the sustained offshore interest to attractive local yields, which continue to support carry trade activities in short-term OMO and treasury bill instruments.

Meanwhile, attention is shifting to the 304th Monetary Policy Committee (MPC) meeting scheduled for February 23–24, 2026, with analysts projecting a “hawkish hold” as policymakers balance inflation moderation with exchange rate stability.

Most market watchers expect the CBN to maintain the Monetary Policy Rate (MPR) at 27 percent, while stepping up liquidity mop-up efforts through increased OMO auctions to manage projected inflows later in February.

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