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.
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.
No comments :
Post a Comment