The Central bank building in Nairobi. CBK has dropped the Discount Window rate to 6.25 from 8per cent, same as the Central Bank Rate. File
Central Bank has lowered the interest rate on a window through which banks in distress borrow from it overnight, exposing the policy dilemma the regulator faces in reining in inflation.
The Discount Window rate, introduced just two weeks ago, has been revised from 8 per cent to 6.25 per cent, the same level as the Central Bank Rate whose inefficiencies it was meant to address.
The only difference now is that commercial banks cannot borrow from the Discount Window amounts higher than their weekly statutory needs such as cash reserve ratio and liquidity ratio. This means that commercial banks cannot borrow from the discount window for margin trading in the foreign exchange and inter-bank money market, as CBK alleged last month when the shilling fell to a record low of Sh91.90 against the dollar.
To police the move, banks that lend to other commercial banks will not be eligible to borrow from the central bank on the same day.
CBK further stated that, in any week, banks will be restricted to borrow a maximum of their statutory cash reserves from the discount window.
“Since the CBK is the lender of last resort, commercial banks should consider other avenues before turning to the discount window to satisfy their liquidity,” said the director banking services, national payment systems and risk management at CBK Jackson Kitili.
The review of the Discount Window rate leaves the rate 2.75 percentage points lower than the Treasury bill rate which is at 9 per cent and 2.1 percentage points lower than the interbank rate.
The introduction of the rate had been taken by banks as a base for setting the interbank rate as well as base lending rates “The new rate had been followed by increase in interest rates by commercial banks which had an adverse effect in the economy. The only option was to introduce more stringent measures,” said Deris Mogoi of Standard Investment Bank.
However analysts have challenged the use of monetary policy to rein in inflation, saying more aggressive macro-economic measures are required.
“The government should take other measures that address the supply constraints fuelling inflation such as food shortage,” said Mr Mogoi.
