The unfolding liquidity squeeze in the financial market, caused largely by the sterilisation of public sector deposits in banks by the Monetary Policy Committee (MPC) at its last meeting in July, exposes the underlying fragile state of the financial system.
The 50% cash reserve ratio (CRR) on public sector deposits, among other developments in the global and domestic financial systems, might have contributed to a massive liquidity squeeze in the interbank market.
It has also resulted in significant volatility in interbank interest rates and the capital market. The dynamics of short term interest rates and yields on Treasury securities, including the Federal Government Bonds, indicate cautious trading and perhaps distrust among the banks and discount houses.
Unfortunately, the pressure on the foreign exchange rate remains unabated suggesting that other factors beyond excessive banking system liquidity might be responsible for the Naira exchange rate volatility.
Ahead of the next MPC meeting on Monday, 23rd – Tuesday, 24th September, 2013, we review the short term development in prices, financial markets, and the exchange rate environment since the last MPC in a bid to provide insight into the likely direction of decisions at the upcoming meeting.
For more information, Please click the following link: Pre-MPC Meeting Report September 2013 – The MPC should choose to save the financial system
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