Capital Markets

CBK pledges interbank rate controls to boost lenders’ liquidity

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Central Bank of Kenya governor Patrick Njoroge. photo | salaton njau | nmg

Circulation of liquidity among banks including small ones is expected to improve after the government committed to put in place the long-awaited controls on the interbank market as part of a package of reforms approved the International Monetary Fund (IMF).

In a letter to the IMF, Treasury CS Henry Rotich and Central Bank of Kenya governor Patrick Njoroge said that the move to introduce the control referred to as an interest rate corridor, combined with a review of the rate cap, would help strengthen the country’s monetary policy framework.

The corridor involved setting the upper and lower limits of interbank rate in alignment with the prevailing Central Bank Rate (CBR).

It is also intended to keep the money market liquid for all intermediaries including small banks that have traditionally been starved of cash from the overnight interbank market.

“In making this request, we commit to strong policies to achieve our programme objectives. These include…strengthening the monetary policy framework, including the introduction of an interest rate corridor following the significant modification of interest rate controls,” reads the letter in part.

READ: Small banks take up costly credit as liquidity tightens

The IMF had disclosed two years ago that the CBK plans to introduce the rate corridor, but nothing came of the promise.

The move to introduce the corridor is seen as necessary to make the CBR a more effective tool in controlling inflation and the exchange rate, and it would also help banks price their loans better by offering more certainty on cost of funds.

Currently, the interbank rate moves freely, going up or down depending on the liquidity needs of banks. In the past one year, the rate has oscillated between four and 11 per cent.

The ability of banks to demand a high premium on the interbank market also means that cash rich lenders would be inclined to provide liquidity in the market at a time the CBK is mopping up cash to rein in inflation.