Capital Markets

Bond, tax payments drain market liquidity

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • The interbank rate has risen sharply on tightening liquidity after the Central Bank of Kenya (CBK) took custody of the Sh81.94 billion raised from investors in the Infrastructure bond sale and banks remitted quarterly tax collections to the exchequer.
  • The rate had been falling since the beginning of the month, hitting two-month low of 3.59 per cent last Friday, but has opened the week on Monday at 4.79 per cent.

The interbank rate has risen sharply on tightening liquidity after the Central Bank of Kenya (CBK) took custody of the Sh81.94 billion raised from investors in the Infrastructure bond sale and banks remitted quarterly tax collections to the exchequer.

The rate had been falling since the beginning of the month, hitting two-month low of 3.59 per cent last Friday, but has opened the week on Monday at 4.79 per cent.

“It is expected that market liquidity will somewhat tighten this week on the back of heavy outflows to the Central Bank in bond settlement as well as from spillovers from the tax disbursement to the revenue authority,” said NCBA in a fixed income note.

The rate at which banks lend to each other on emergency basis is a good indicator of liquidity levels in the money market, going up when liquidity tightens and falling when the market is flush with shillings. Banks are usually among the highest buyers of government paper and the oversubscription in the Sh60 billion bond that closed last week has, therefore, reduced liquidity in the market.