Kenyan Market Experiences Increased Liquidity Amid Tough Economic Times

The liquidity in the Kenyan market increased in the week ending 14^th July 2023, evidenced by the decrease in the interbank rates to 8.6% from a high of 10.1% at the beginning of the month of July 2023. The interbank rate is the cost at which banks borrow money from each other to meet short-term funding needs and manage their liquidity positions.

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In its weekly bulletin, CBK highlighted that liquidity in the money market has increased, supported by increased government payments in addition to commercial banks holding an excess reserve of Kshs 37.4 bn in relation to the 4.25% Cash Reserve Ratio (CRR). CRR represents the cash reserves commercial banks are required to deposit with CBK out of their total domestic and foreign-denominated deposit liabilities. This is meant to help in case the bank falls into crisis. When banks give up in excess of the CRR to the CBK, it could be a sign of increased liquidity in the market.

The recent government payments to contractors and county disbursements during the start of the new fiscal year have been pointed to as having caused the current decrease in interbank rates. The rates had increased to a record high of over 10.0% on the back of tightened CBK rates, which coincided with the delay in paying contractors and county disbursements, leading to reduced liquidity and hence higher interbank rates.

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Central banks use the CRR to control liquidity in the market. When the money supply is high, Central banks increase CRR to reduce the money available for lending, which in turn translates to higher interbank rates, which are often transferred to the consumer through increasing loan rates. In addition, government spending is a crucial fiscal policy to control liquidity. Increased liquidity calls for reduced government spending as well as increased government borrowing. In this context, interbank rates are expected to record an increase due to the sale of the July bond that mopped Kshs 38.6 bn from the economy.

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