The CBK expects these measures to enhance monetary policy transmission and support the key objectives of price and financial system stability
BY SILAS APOLLO
The Central Bank of Kenya’s Monetary Policy Committee has introduced an interbank interest rate around the Central Bank Rate (CBR) at over and below 2.5%, in line with the reforms outlined in the White Paper on modernisation of the monetary policy framework and operations
The new rates, adjusted to inflation, was approved by the bank’s Monetary Policy Committee (MPC) on Wednesday, and aims at ensuring that the interbank rate, as an operating target, closely tracks the CBR.
MPC noted in a statement that 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/offer at their bid/offer price.
In addition, to improve access to the Discount (Overnight) Window, it also approved changes to the terms and conditions for the facility, and the changes take effect immediately.
“The applicable interest rate on the facility has been reviewed from 600 basis points above the CBR to 400 basis points above the CBR,” CBK said in a statement.
As has been the case, it added, advances through the window will be secured by government of Kenya securities subject to a “haircut of 10% and 20%” for Treasury bills and Treasury bonds, respectively.
“No other administrative encumbrances will be attached to the facility. The improved access to this facility is designed to enhance monetary policy transmission and complement the effectiveness of the interest rate corridor,” CBK said, adding that the existing terms for access to the Intra-day Liquidity Facility (ILF) remain unchanged.
The CBK also implemented the DhowCSD on July 31, 2023, an upgraded Central Securities Depository infrastructure which will greatly enhance efficiency in investment in Government Securities. This system has enabled an ‘anywhere anytime’ investment in Treasury Bills and Treasury Bonds, a development that will greatly benefit all investors, and particularly Kenyan Diaspora.
DhowCSD will also improve the functioning of the interbank market by facilitating collaterised lending amongst commercial banks and further reduce segmentation in the interbank market.