The Central Bank of Kenya has taken steps to address interbank liquidity challenges linked to interbank lending. The CBK introduced a new interest rate corridor that sets the lending rate among banks. This corridor restricts interbank lending rates to a specific range. In the recently held monetary policy committee meeting of 9th August, measures to maintain the inflation target range of 2.5 percent to 7.5 percent were approved by the committee, introducing the new interbank corridor at 2.5 percent below or above the central bank rate (CBR).
Read more: CBK Should Consider Implementing an Interest Rate Corridor
CBK governor Kamau Thugge said the monetary policy operations would be aimed at ensuring that the interbank rate, as an operating target, closely tracks the CBR. The framework allows the CBK’s open market operations to be conducted on the basis of a flexible rate fixed quantity, as is currently the case. This implies that the CBK will determine the amount of liquidity to inject or withdraw from the banking system, and banks will be free to bid for the amount of liquidity they need or offer at their bid or offer price.
This strategy aims to oversee the interest rates that banks can apply, thereby augmenting the efficiency of translating resolutions put forth by the Monetary Policy Committee. For smaller banks grappling with a funding problem due to a significant surge in interest rates, this measure will provide much-needed relief. The recent escalation in interest rates has had impacts on the expenses associated with borrowing in the interbank market. Typically, banks address their deficits by borrowing from one another to secure a portion of their funding.
Read more: Central Bank of Kenya Holds Benchmark Interest Rate Steady at 10.5%
The recent growing dependence of tier two and three banks on the CBK for financial support has led to a decrease in the cumulative deposits held by the Central Bank. The Kenya Bankers Association (KBA) highlighted that smaller banks, facing difficulties in obtaining funds from larger institutions due to perceived risks, have been particularly impacted by stricter funding conditions.
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