Liquid money market sees banks lend each other at reduced rate

A liquid money market has seen the rate at which banks lend each other on emergency basis fall to 2.5 per cent from a high of 25 per cent nine months ago.

Central Bank of Kenya (CBK) said in its latest market bulletin that the money market was relatively liquid in the previous week while it was also helping spread the liquidity through the repo market.

Commercial banks’ clearing account balances at CBK stood at Sh17.2 billion by June 8, indicating the sector is not stressed for liquidity.

In terms of volumes, there has been a decline in the last one week with banks lending each other Sh45 billion compared to Sh60 billion in the previous week.

“There is a lot of liquidity in tier one banks and they are cautious in lending to tier two and three banks. A lot of interest has also moved to government securities where many banks are holding them as available for sale in order to trade them when liquidity becomes strained. This could be the reason the interbank rate has come off in the past few weeks,” said Kingdom Securities senior research analyst Mercyline Gatebi.

Banks have however since March kept off the discount window of the CBK, which is currently lending at a steep rate of 16.5 per cent.

The central bank also lends to banks through the reverse repos which is now 11.55 per cent, with analysts partially attributing the gap between the reverse repo and the interbank rate to mistrust among lenders.

Banks with excess liquidity are willing to lend cheaply to peers they trust while locking out those they consider risky even with the promise of higher returns, forcing them to turn to CBK for money.

In the primary government securities market, investors have continued to oversubscribe even as rates fell to their lowest levels since July 2013.

The 91-day Treasury bill rate is now at 7.3 per cent, while the 182-day and 364-day papers are offering 9.6 and 10.8 per cent respectively. In the most recent auctions held last week, investors offered Sh29.3 billion against the Sh16 billion the government was seeking.

The decline also comes in the wake of the MPC decision last month to cut the base lending rate from 11.5 to 10.5 per cent as inflationary pressures ease and the currency remains stable.

However, analysts expect that the rates may not slide further.

“Despite the CBK reducing the policy rate by 100 basis points, we believe that the rates have bottomed out and is likely to stabilise at the current level especially given that we have come to  the end of the fiscal year,” said Cytonn Investments in a market analysis note.