IN a bid to manage liquidity and ensure monetary stability, the Central Bank of Nigeria (CBN) significantly ramped up its Open Market Operations (OMO) in 2024. The apex bank absorbed an unprecedented N10.18 trillion through OMO bills, a sharp increase from the N900 billion and N850 billion recorded in 2023 and 2022, respectively.

This aggressive liquidity management strategy was aimed at addressing inflationary pressures and stabilizing the financial system. By reintroducing frequent OMO bills, the CBN tightened market liquidity and drove short-term yield rates higher, resulting in an inverted yield curve.

Subscriptions to OMO bills skyrocketed to N16.55 trillion in 2024, a significant rise from N1.49 trillion in 2023 and N4.49 trillion in 2022. The yields on these instruments also surged, jumping from 17.65 percent at the close of 2023 to 31.54 percent by the end of 2024.

The inversion of the yield curve—where short-term bond interest rates exceed those of long-term bonds—has raised concerns about the health of the economy. An inverted yield curve is often considered a precursor to economic downturns, as it reflects market uncertainty and expectations of lower growth.

The CBN’s strategy has pushed banks to deposit excess liquidity at record levels and increase participation in treasury auctions. This trend highlights a growing risk aversion among banks, which are shying away from lending to the real sector due to higher borrowing costs.

According to a December 31 report by Meristem Securities, “The yield curve has been inverted for 253 days, reflecting persistent market concerns over broad economic conditions, inflation, growth prospects, and the implications of an aggressive monetary policy environment.”

As the economy transitions into 2025, analysts foresee the potential for the yield curve to normalize. Meristem Securities suggests that if the effects of previous rate hikes begin to materialize and the CBN adopts a less aggressive monetary stance, the curve could steepen.

“A yield curve correction, or steepening, could occur if the yield on longer-dated securities, such as 10-year and 30-year FGN bonds, begins to rise while short-term yields gradually moderate,” Meristem analysts noted. This process would restore the yield curve to its typical upward-sloping shape.”

However, uncertainty lingers. Analysts question whether the anticipated monetary policy reversal will lead to a sustained steepening or prolong the current inversion.

Yields increased across all maturities throughout 2024, reflecting the impact of the CBN’s aggressive monetary policies. The short end of the yield curve saw the most significant rise, with yields climbing by 1,203 basis points (bps). Mid-term yields rose by 704bps, while long-term yields increased by 106bps from January to year-end.

By December 2024, the yield on 30-year government bonds stood at 16.99 percent, up from 15.93 percent in January. Similarly, the yield on 5-year maturities climbed to 20.12 percent.

The CBN’s intensified use of OMO reflects its commitment to combating inflation and managing liquidity in the financial system. However, the resulting yield curve inversion and elevated borrowing costs have raised questions about the long-term impact on economic growth and lending to the private sector.

As the CBN charts its course for 2025, the focus will likely shift to balancing inflation control with measures to support economic expansion. Market participants will watch closely to see whether the apex bank adopts a less aggressive monetary stance to address these challenges.

According to analysts, 2024 was marked by an aggressive liquidity mop-up by the CBN through OMO bills, resulting in significant changes in yield dynamics and liquidity trends. The coming year will test the effectiveness of these policies in stabilising the economy while fostering growth.

Copyright © 2022 Nigerian Tribune Provided by SyndiGate Media Inc. (Syndigate.info).