CBK spurs inter bank trade

May 27, 2009
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, NAIROBI, Kenya, May 27 – The Central Bank of Kenya (CBK) has disclosed that it is currently creating a platform that will enhance inter bank trading.

CBK Governor Prof Njuguna Ndung’u told a press briefing on Tuesday that such a mechanism would help eliminate the mistrust that exist among the different segments of the market structure and help them participate in the repo market.

“We will shoulder the risk and allow them to trade. What we want to do is encourage an inter bank market that reflects the totality of the banks and also allow collateral issues to be resolved,” he explained.

Currently, only about eight banks trade in the inter bank market every day leaving out the other 35. The trading helps to inform CBK on a daily basis whether there is credit crunch or not

The Governor said once this is addressed, it would also enable them to manage and price liquidity in the market.

Speaking during a press conference, Prof Ndungu also said they are inviting suggestions on which monetary policy regime Kenya and the rest of the East African countries should adopt particularly as the region prepares to integrate.

He said a conference titled ‘The choice of monetary policy regime’ on Thursday and which brings together governors from the region and experts in the field would provide an opportunity for the participants to brainstorm on the best ways to have a uniform policy.

During the briefing, Prof Ndung’u defended the CBK’s Monetary Policy Committee decision to cut the Central Bank Rate (CBR) by 25 basis points to eight percent. He said this was meant to improve liquidity management but also enhance the potential for future economic growth.

The committee also moved to strengthen the operations of the repo market by fixing the tenure of (repo) transactions to a period of five days, with immediate effect.

Prof Ndung’u said they had reviewed the market responses and noticed that there had been short tem distortions which have temporarily caused interest rates to rise.

He said Thursday’s release of the 2009 Economic Survey Report provided them with the opportunity to track down the growth in the second and third quarters of 2008 and alluded to a turnaround in the first quarter of 2009.

The Governor however said what is of concern to them was liquidity position of the banking sector which would facilitate lending to the private sector.

A section of financial analysts have however faulted CBK for failing to cut the cash reserve ratio despite a marked tightening of liquidity in Kenya in recent weeks.

There have been a lot of pressures on liquidity resulting from ambitious government and private sector borrowing.

Standard Chartered Head of Regional Research for Africa, Razia Khan, said the CBK appears to be playing down the threat of continued tightness in market liquidity.

She also questioned the ‘evidence’ of a turnaround in the Kenyan economy, wondering how meaningful it might be for the overall growth trajectory.

“With news out that post election-crisis, 2008 growth may have been below two percent, it is clear that the Kenyan economy is starting off on a sufficiently low base for any recovery to be fragile, at best,” she observed.

She also pointed out that although rising levels of investment and development expenditure are promising for future growth, they are unlikely to be as meaningful in a credit-constrained environment. 

“From this perspective, a cut in the cash reserve ratio may have been a more effective means of supporting future growth,” she reasoned.

Ms Khan argued that the CBK’s preference for an adjustment to the Bank rate, suggests that it prefers to exercise caution with respect to the future outlook.

She added that while the move to fix the tenure of repo transactions may aid predictability of market liquidity conditions – the underlying cause of the dislocation in markets, the strength of competition for funds, has yet to be addressed. 

“As such, a CRR cut in the future cannot be ruled out, although this will depend – in part – on inflation-related developments,” she emphasised.

In the meantime, the analyst expect the Bank rate to be held steady at  eight percent at the next MPC meeting in July, which will allow the authorities enough time to review the impact of the rate cuts already in place. 

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