CBK to Bolster Banks Hit by Liquidity Shortfalls

The banking sector regulator has established a new cap to control how banks lend to one another in order to alleviate the pain felt by small banks experiencing liquidity shortfalls.

The Central Bank of Kenya’s (CBK) new interest rate corridor allows the regulator to kill two birds with one stone, as the shift also signals the beginning of inflation targeting as part of monetary policy operations.

The setting up of an interest corridor within which interbank lending rates must fall no more than 2.5 percentage points over the Central Bank Rate (CBR) will limit interest rates charged by banks while strengthening the translation of Monetary Policy Committee decisions.

This suggests that the central bank will have a tighter handle on interest rates in the banking sector.

“We believe this framework will be more efficient and effective in implementing monetary policy decisions. For example, if we lower the CBR in the future, then everything else will move lower,” CBK Governor Kamau Thugge said on Thursday.

Interest rates are likely to remain around the CBR, which is considered the economy’s lowest cost of money.

Borrowers might expect reduced interest rates once the mechanism that determines the cost of funding for banks is fully implemented.

“The CBK will be able to transmit monetary policy better because the interbank rate which drives the cost to the banks will be maintained within the policy range. Of significance, however, and just to demonstrate that there is a deliberate effort to ensure that these measures are self-reinforcing, CBK also reduced the borrowing rate at the overnight borrowing window,” Kenya Bankers Association CEO Habil Olaka told one local paper.

Banks usually access a portion of their capital by borrowing from one another, which means that interest rates are included in the cost of loans to clients.