The interbank lending rate has spiked to a near five-month high at the start of 2024 after the tightening of monetary policy by the Central Bank of Kenya (CBK) in December.
According to data from the CBK, the mean lending rate between banks stood at 14.3 percent on January 2, 2024, the highest since August 7.
The higher cost for the banks’ overnight lending facility comes in the backdrop of CBK’s jumbo rate increase on December 5, which moved the Central Bank Rate (CBR) from 10.5 percent to 12.5 percent.
The spike in the interbank lending rate in weeks since the policy rate move shows the translation of CBK’s stance and signals higher long-term interest rates, including borrowing costs by bank customers.
The interbank lending rate is currently expected to hover between 10 and 15 percent following previous reforms enacted by the CBK to enhance monetary policy transmission.
On August 10, the CBK introduced an interbank interest rate corridor around the CBR which was set at a range of 2.5 percent, above or below the prevailing benchmark lending rate.
The move effectively brought interbank lending rates under the control of the CBK from which the apex bank can influence lending rates by adjusting its monetary stance.
Meanwhile controls on interbank lending rates are desired to influence other costs as interbank borrowing rates feed into long-term interest rates, including borrowing rates.
“Henceforth, the monetary policy operations will be aimed at ensuring that the interbank rate, as an operating target, closely tracks the CBR. The framework allows the CBK’s open market operations to be conducted on the basis of a flexible rate fixed quantity as is currently the case,” the CBK said on August 10.
With the CBR currently set at 12.5 percent, this implies that the mean interbank rate must not fall below 10 percent or rise above 15 percent.
Last month, the CBK raised the CBR to the highest level in more than 11 years with the aim of arresting the depreciation of the local currency and anchoring inflation expectations.
The higher CBR and interbank lending rate is expected to have implications for borrowers as the cost of credit moves higher.
