CBK acts to ease inflation

August 29, 2011
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, NAIROBI, Kenya, Aug 29 – As the Central Bank of Kenya (CBK) continues to grapple with the best way to contain the runaway inflation, it has decided to review cash reserve ratios (CRR) for commercial banks.

In a banking circular(number 9 of 2011), the regulator has moved to ease the recent surge in interest rates by revising rules for tapping into the discount window through which banks borrow overnight loans.

The CBK has told commercial banks that the 4.75 percent cash reserve ratio for banks would be calculated using a monthly average as opposed to a weekly average.

This comes barely a month after the regulator’s Monetary Policy Committee (MPC) decision to allow banks to maintain a weekly rather than a daily average cash reserve ratio as a means to ease pressure on interest rates.

CBK says that in the previous circular, the differential between the interbank and the CBR was either fully incorporated or excluded.

“However, this weight will henceforth vary between zero and one according to the specific liquidity conditions in the interbank market,” the circular reads.

With the undertaking by the Central Bank, banks will be free to deviate from the 4.75 percent requirement on any given day, but not fall below three percent provided that the overall average of the month will be at least 4.75 percent.

“Failure to observe the required average will lead to penalisation by the Central Bank at the current penalty rate,” the CBK stressed.

However the new directive has not been all that clear with commercial banks.

Duncan Kinuthia of Commercial Bank of Africa’s Treasury Department said that they were still in consultation with CBK to make its implementation easier.

“We still need to get into contact with them (CBK) on this one. Some people seem to think that it may lead to a rate cut because the current overnight lending rates and interbank rate are at levels we have not experience before,” Mr Kinuthia said.

In Monday early morning trade, the shilling weakened further against the dollar hitting a low of Sh94.33 at 11am. The shilling closed at Sh92.85 on Friday.
“The currency is losing because market is still trying to interpret the Central Bank directive hence why it’s on the back foot at the moment,” Mr Kinuthia said.

On August 12, the Central Bank released a banking circular informing banks that overnight lending rate would increase by an average of three percent which effectively makes it hard for banks to borrow from the CBK.

In the new order, the interest rate charged at the CBK Discount Overnight Window is calculated using the CBR (currently 6.25 percent) plus the previous day’s average interbank rate minus the CBR plus a penalty of three percentage points.
Mr Kinuthia expects a statement from the Treasury to reign in on high lending rates and inflation to stabilise the market.

“We have to take some action toward that end, basically just to ensure that we restore some kind of stability on the monetary side. We are in discussions with the central bank to be able to deal with this particular issue to ensure stability and normalcy returns,” Finance Minister Uhuru Kenyatta said last week.

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