October 09, (THEWILL) — The Central Bank of Nigeria’s (CBN) intensified liquidity mop-up has caused commercial banks’ placements in its Standing Deposit Facility (SDF) to plunge by 42.3 percent within a week — from N6.07 trillion on October 2, to N3.5 trillion on October 8, 2025 — according to figures from the apex bank’s daily market report.
The sharp decline signals a continuation of the CBN’s tight-money stance, which aims to drain excess liquidity from the financial system, control inflation, and defend the naira from renewed depreciation pressures.
The Standing Deposit Facility allows banks to temporarily park surplus cash with the CBN in exchange for modest interest. A steep fall in balances, therefore, suggests that liquidity in the banking system has been deliberately squeezed through the CBN’s monetary instruments.
This latest contraction follows a fresh round of Cash Reserve Ratio (CRR) debits, the mandatory portion of customer deposits that banks must maintain with the CBN and renewed Open Market Operations (OMO) auctions designed to absorb excess funds.
The CRR, currently pegged at 45 percent for commercial banks, is one of the highest in Africa and has become the CBN’s key lever for sterilising liquidity. Each debit immediately reduces the volume of money available for banks to lend or invest. OMO sales, on the other hand, provide a secure avenue for banks to invest in short-term government securities, effectively transferring cash from the open market back to the apex bank.
Policy context and broader effects:
The liquidity tightening reflects the CBN’s commitment to its inflation-targeting framework at a time when consumer prices remain elevated. Nigeria’s headline inflation currently stands above 30 percent, driven by higher food and transport costs and ongoing currency adjustments.
By aggressively mopping up liquidity, the CBN aims to limit speculative demand for foreign exchange and restore some stability to the naira, which has come under pressure from import demand and portfolio outflows. The move also aligns with the apex bank’s recent tightening of monetary policy through higher interest rates and more frequent OMO issuances.
However, the policy has trade-offs. As cash positions shrink, banks face higher short-term funding costs in the interbank market and may respond by increasing lending rates. This raises borrowing costs for households and businesses, potentially dampening credit growth to key sectors such as manufacturing, trade, and small-scale enterprises.
With CRR debits becoming more frequent, banks are reportedly adjusting liquidity strategies and limiting new credit exposures to stay within regulatory thresholds. The tighter stance has also driven an uptick in money-market yields, offering investors higher returns on short-term instruments.
Market reactions:
In the interbank market, rates such as the Overnight (OVN) and Open Buy-Back (OBB) have shown upward pressure, reflecting reduced availability of lendable funds. Dealers expect this trend to persist through the month unless the CBN injects liquidity via maturities or open-market repayments.
Equity traders, meanwhile, anticipate that continued monetary restraint could weigh on sentiment, as investors rotate toward fixed-income instruments with more attractive yields. The naira, however, has shown modest resilience in the past week, partly due to the liquidity squeeze curbing speculative activity in the foreign-exchange window.
Market outlook:
The 42 percent plunge in SDF balances underscores the CBN’s aggressive liquidity-management posture. A signal that it remains focused on anchoring inflation expectations, even at the cost of short-term strain in the banking sector.
Yet, the sustainability of this policy may depend on fiscal coordination and supply-side reforms to ease structural inflation. Analysts caution that monetary tightening alone cannot resolve the underlying pressures from food prices, energy costs, and import dependence.
Still, the CBN’s latest move demonstrates its determination to maintain monetary discipline and stabilise the macroeconomic environment. A necessary, though painful step toward long-term price and currency stability.
Ogochukwu Onwaeze
