Inter-bank lending rate hits 21-month high on tight cash

 

Central Bank of Kenya. FILE PHOTO | NMG

By TIMOTHY ODINGA
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SUMMARY

• Reduced liquidity in the money markets pushed the inter-bank lending rate to a 21-month high of 6.579 percent on Friday.
• The rate has risen to the highest level since December 2019 when it stood at 6.78 percent.

Reduced liquidity in the money markets pushed the inter-bank lending rate to a 21-month high of 6.579 percent on Friday.

The rate, which denotes the interest commercial banks charge on short-term lending to each other to meet basic operational requirements, has risen to the highest level since December 2019 when it stood at 6.78 percent.

The rising rate has been attributed mainly to tight liquidity going into the last quarter of the year.

“Liquidity in the money market has been relatively tight mainly due to higher government receipts compared to payment,” said the Central Bank of Kenya in its weekly bulletin.

The average value traded in the market fell by Sh2 billion from Sh18.2 billion to Sh16.3 billion last week with deals per day also declining to 29 from 31 indicating a squeezed market.

“The sale of the infrastructure bond coupled with tax payments has led to money leaving commercial banks to the Central Bank and the Ex-chequer, as result commercial banks are experiencing tight liquidity,” said Ken Minjire, a senior associate for debt and equity at AIB-AXYS.

The rise comes at a time when the local currency slumped to the lowest point since December last year touching a low of 110.42 Tuesday.

Pressure from importers has been blamed for the misfortunes of the currency that has now shed four percent since mid-May when it hit its highest this year at 106.5.

According to experts, the Inter-bank lending rate and the exchange rate are connected but for a longer period.

A weaker shilling would lead to the Central Bank of Kenya using the interbank market to mop the local currency and in a way manage the shilling.

However, a rise in the interbank rates within a short period as is the case currently might not be very much linked to the underperforming currency.

The weakening of the shilling comes in a week when the Central Bank of Kenya is expected to hold its bi-monthly Monetary Policy Committee meeting Tuesday.

Experts have, however, remained optimistic that the small depreciation will have either very little effect on inflation in the coming days.