Kenya eases interbank pressures

Aug 29, 2011

NAIROBI - Kenya’s central bank moved on Friday to ease sky-high interbank rates and boost shilling liquidity by revising rules for tapping into its discount window, taking action a day after the Finance Minister challenged the bank to restore monetary stability.

NAIROBI - Kenya’s central bank moved on Friday to ease sky-high interbank rates and boost shilling liquidity by revising rules for tapping into its discount window, taking action a day after the Finance Ministerchallenged the bank to restore monetary stability.

The new rules will allow banks leeway restore to manage cash reserves by dropping under the 4.75% cash reserve ratio limit on a given day to as low as 3%, provided they maintained a monthly average of 4.75%.

The bank said in a circular to commercial bank chief executives it would henceforth use a moving average of interbank lending rates over an unspecified longer period to compute its discount window rate, as opposed to using the previous day’s weighted average interbank lending rate.

In theory that should mean the discount rate will fall, given the steady rise in Kenyan interbank rates this month, though one trader said he did not expect a significant drop. The weighted average interbank lending rate surged to 26.37% on Thursday from 24.25% a day before and from 8.34% on August 12.

On Thursday, the Finance Minister Uhuru Kenyatta challenged the Central Bank to restore monetary stability following the sharp spike in interbank rates.

Traders said they expected a slight improvement in shilling liquidity in the market, but that the drop in interbank lending rates would not be as drastic. “I am not seeing so much change on the liquidity. I am not seeing a major change on the interest rate yet. There will be liquidity, but to me it does not (seem) that the rate will come down significantly,” said Robert Gatobu, a trader at Bank of Africa.

At its previous revision of rules on August 12, the centralbank began charging lenders tapping the overnight window a rate based on the Central Bank Rate (CBR) plus the previous day’s average interbank rate, minus the central bank’s rate of 6.25%plus a penalty of three percentage points.

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