Interbank lending rate hits highest in 21 months due to cash crunch

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Capital markets

Interbank lending rate hits highest in 21 months due to cash crunch


Central Bank of Kenya. PHOTO FILE | NMG

Timothy Odinga

Summary

  • The reduced liquidity in the money markets pushed the interbank lending rate to a 21-month high of 6.579 percent on Friday.
  • The rate reached its highest level since December 2019, when it stood at 6.78%.

The reduced liquidity in the money markets pushed the interbank lending rate to a 21-month high of 6.579 percent on Friday.

The rate, which is the interest charged by commercial banks on short-term loans between them to meet basic operational needs, reached its highest level since December 2019, when it stood at 6.78%.

The rise in rates was attributed mainly to the tightening of liquidity in the last quarter of the year.

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

The average market traded value fell by 2 billion shillings from 18.2 billion shillings to 16.3 billion shillings last week, with daily trades also down to 29 from 31 indicating a tight market. .

“The sale of the infrastructure bond coupled with tax payments has left money in the commercial banks at the Central Bank and the Ex-Checker, as a result commercial banks are in tight liquidity.” said Ken Minjire, senior debt and equity partner at AIB-AXYS.

The rise comes at a time when the local currency collapsed to its lowest since December of last year, hitting a low of 110.42 on Tuesday.

Pressure from importers has been blamed for the woes of the currency which has now lost 4% since mid-May when it hit its highest level this year at 106.5.

According to experts, the rate of interbank loans and the exchange rate are linked but for a longer period.

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

However, a rise in interbank rates over a short period of time as is currently the case may not be very much related to the currency’s underperformance.

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

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

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