The banking sector regulator has set a new cap to guide how banks lend to one another to soften the pain for small ones experiencing liquidity shortfalls.
The new interest rate corridor by the Central Bank of Kenya (CBK) allows the regulator to kill two birds with one stone as the change also marks the start of inflation targeting part of monetary policy operations.
The setting of an interest corridor around which interbank lending rates must fall at no more than 2.5 percent above the Central Bank Rate (CBR) will control interest rates charged by banks while improving the translation of Monetary Policy Committee decisions.
This implies that the apex bank will have a firmer grip on banking sector interest rates.
“We believe this framework will be more efficient and effective in implementing monetary policy decisions. For example, if we lower the CBR in the future, then everything else will move lower,” CBK Governor Kamau Thugge said on Thursday.
Interest rates are expected to stick around the CBR which is deemed as the lowest cost of money in the economy.
For borrowers, lower interest rates will be in the offing upon the full implementation of the tool that sets the cost of funding to banks.
“The CBK will be able to transmit monetary policy better because the interbank rate which drives the cost to the banks will be maintained within the policy range. Of significance, however, and just to demonstrate that there is a deliberate effort to ensure that these measures are self-reinforcing, CBK also reduced the borrowing rate at the overnight borrowing window,” Kenya Bankers Association CEO Habil Olaka told the Business Daily on Thursday.
