CBK pledges to steer market into gradual interest rate decline

What you need to know:

CBK governor Patrick Njoroge said the CBK would not want to bring the rates down quickly in a way that would destabilise the markets, meaning high rates are likely to linger for months.
Dr Njoroge said the rates had overshot given that the Central Bank Rate (CBR) had only been raised by three percentage points.
The T-bill rate has more than doubled in three months while applicable lending rates have risen by as much as seven percentage points.

The Central Bank of Kenya (CBK) will steer the financial markets into a gradual rather than sharp fall of interest rates, it said on Wednesday.

Governor Patrick Njoroge said the CBK would not want to bring the rates down quickly in a way that would destabilise the markets, meaning high rates are likely to linger for months.

“We want to give the economy a soft landing. We will engineer all the interest rates down gradually. We don’t want a situation where you have been accelerating the car and then you apply brakes suddenly,” said Dr Njoroge.

Addressing his second press conference since coming to office, the governor said the CBK is ready to provide liquidity to the banking system to keep it properly functional and stable even in view of Imperial Bank troubles.

Dr Njoroge said the rates had overshot given that the Central Bank Rate (CBR) had only been raised by three percentage points. The T-bill rate has more than doubled in three months while applicable lending rates have risen by as much as seven percentage points.

“What we are seeing is that the rates have overshot. We only raised the CBR by 300 basis points, but we see the market rates have risen by more than that,” said Dr Njoroge.

He noted interbank rates had come down to 13.9 per cent as of Monday this week, making the cost of funds cheaper for institutions. The rates had risen to about 26 per cent.

READ: Large depositors gain from high interest rates

Interest rates have risen dramatically in the past few months with the lending rate in most banks up to over 20 per cent just as yields on the Treasury bills and bonds hit more than 22 per cent in the primary market this week.

In the latest auction of the Treasury bill, yields rose for the 182-day paper to 22.29 per cent compared to last week’s rate of 21.84 per cent. The 364-day paper sold for 22.36 per cent, slightly down from rate of 21.88 per cent realised last week.

He said that it was short-term rates — such as the interbank, T-bill and T-bond — that need to come down as the long-term bond rates are still relatively low.

He noted the yield curve is currently inverted such that the rates for T-bills are higher than those for bonds.