The Central Bank of Kenya (CBK) had in 2012 planned to introduce an interest rate corridor to help ensure that the interbank rates remain within a reasonable range around the Central Bank Rate (CBR). The aim was to minimize the volatility in the interbank rate by setting the target range to be within the range of 250 bps below and above the CBR rate.
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Additionally, the introduction of the interest rate corridor would have enabled CBK to have better control over the short-term interest rates, thereby influencing the broader economic conditions of the country. By adjusting the CBR rates, CBK would have been able to influence the rate at which to lend or accept deposits from commercial banks, thereby influencing the overall level of interest rates in the country.
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For example, if CBK wants to encourage borrowing and economic activity, it might lower the CBR, making borrowing cheaper for commercial banks. This could lead to lower lending rates for consumers and businesses, thereby stimulating spending and investment. In contrast, If the central bank wants to curb inflation or prevent excessive borrowing, it might raise the CBR rate. This would make borrowing more expensive and simultaneously slow down economic activity.
The plan was later left aside due to the placement of three banks in receivership and the introduction of interest rate caps in 2015 and 2016, as CBK had to concentrate on ensuring the stability of the banking sector. According to CBK statistics, the Interbank rate has reached a high of 17.4% in Q3’2023 from the 10.2% interbank rate as of 3rd July 2023.
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The high volatility in interbank rates further emphasises the need for the rate to be regulated. Otherwise, the banks will, start demanding high interest rates from their customers, consequently slowing down economic development.
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