Interbank rates hit 7pc as firms pay consumption tax

What you need to know:

Barely a week ago, the interbank market rate was 5.81 per cent, but within a few days it hit six per cent before moving up further to seven per cent.

Interbank rates, the price banks charge each other for overnight lending, have risen again to stand at an average 7.13 per cent barely two weeks after falling below six per cent.

As of October 24, the rate had risen for the seventh consecutive session as reduced liquidity hit the market on tax payment and continued mop-ups by the Central Bank of Kenya (CBK).

Just over a week ago, the interbank market rate was 5.81 per cent, but within a few days it hit six per cent before moving up further to seven per cent.

Market players said the need to keep the shilling stable and prevent a situation where it weakens too fast was a major factor behind the market tightening.

The other factors relate to payment of value added tax (CBK) which must be done by the 20th of each month.

“The average interbank rate rose to 6.62 per cent in the week ending October 22, 2014 from 6.05 per cent the previous week,” said the CBK in the Weekly Bulletin.

The regulator added that the volume transacted increased slightly to Sh15.65 billion from Sh15.16 billion traded in the previous week whereas the average number of deals increased from 33 to 40 deals.

“The mopping up by the central bank and the fact that people were paying for VAT last week has pushed the interbank market rates up a bit,” said Sheikh Mehran, head of Treasury at the I&M Bank.

Mr Mehran said the high rates are likely to persist in the coming days especially given many institutions were yesterday paying for the recently floated infrastructure bond.

Remain high

“We expect the rates to remain high as long as the CBK keeps mopping up to support the Kenya shilling.

‘‘The just concluded bond sale and upcoming tranches will also affect the rates. We expect that the central bank will continue with its mop-up operations,” said Mr Mehran.

The Treasury is expected to raise more cash through an infrastructure bond in the coming weeks.

The first tranche of the bond raised about Sh15 billion. Upcoming tranches are expected to raise the other 19 billion to make a total of Sh34 billion under a programme intended for road construction and energy projects.

A Treasury dealer in a commercial bank said the reduction in liquidity was not very high to warrant intervention by the regulator though. Such intervention, he said, would only be warranted if the interbank rates went beyond 10 per cent.