Market News

Interbank lending rate declines to three-month low

The Central Bank of Kenya (CBK) building in Nairobi. FILE PHOTO | NMG
The Central Bank of Kenya (CBK) building in Nairobi. FILE PHOTO | NMG 

The interbank rate has fallen to a three-month low indicating ample liquidity in the money markets, which will potentially support the performance of this month’s Sh40 billion bond sale.

Latest Central Bank of Kenya data shows banks are borrowing from each other on emergency basis at 3.46 per cent, which matches the lowest rate seen since mid-July. The rate had climbed as high as 8.5 per cent at the beginning of August on the back of delayed government disbursements to its departments and contractors, but has gradually come down as cash flow through the market improved.

“The average interbank rate’s decline…is attributed to improved liquidity condition on increased government payments,” said Genghis Capital in a fixed income note.

Ample liquidity in the market, however, has the potential of putting the shilling under pressure in the short term, due to the laws of demand and supply.

The shilling normally gains on the dollar when liquidity is tight, with the CBK using liquidity withdrawal as a tool to correct rapid depreciation.

On the other hand, when the shilling gains on the dollar too quickly, the regulator can step in by injecting the local unit into the market, with these actions normally being done through the Repo market.

This week, the shilling has been stable against the dollar, exchanging in a tight band of between 100.85 and 100.90 on average.

For the Treasury, the liquid market will boost the prospects of a higher bid volumes from investors for its 15-year Sh40 billion bond currently on sale.

Although the market has shown a preference for shorter tenor paper in recent months, lack of supply on these short term securities could push investors towards the 15-year primary offer, which carries a coupon of 12.75 per cent.