NAIROBI, Kenya, Aug 1 – The Central Bank of Kenya expects its recent decision to allow commercial banks to maintain a Cash Reserve Ratio (CRR) based on weekly average to reduce the cost of borrowing in the country.
CBK Governor Prof Njuguna Ndung’u said on Monday that by allowing banks to maintain a weekly rather than daily average CRR, was in line with its monetary policy stance to ease pressure on interest rates.
Prof Ndung’u said he expects the move to save lenders in borrowing costs, previously incurred to secure overnight loans.
“The inter-bank rate has been responding effectively to monetary policy signals. However, the immediate response of the inter-bank rate being equal to the CBR (Central Bank Rate) meant that borrowers were effectively being charged a penalty discount rate,” Prof Ndung’u said.
The Governor said the change in rules, following the Monetary Policy Committee (MPC) meeting held last Wednesday allows for more flexibility amongst banks, giving them more time to comply with the liquidity requirements.
“The first objective in the interest rate regime was to remove arbitrage opportunities. It also provides liquidity for banks through reserve repos to stabilise the market,” he said.
The CBK expects the reduction in frequency of borrowing by banks to lower the cost of funds.
The MPC held steady its benchmark interest rate at 6.25 percent arguing that further tightening of monetary policy by hiking the CBR rate would be going against what the bank was trying to achieve in lowering inflation.
At least eight banks including Commercial Bank of Africa, KCB, Prime, UBA, NIC, Equatorial and Eco Bank have all raised their lending rates in recent weeks after the base rate went up by 25 basis points in May.
The MPC pointed out that its recent monetary policy-tightening actions had reined in inflationary expectations but remained concerned about persistent inflationary pressures and exchange rate volatility.
In July, inflation shot up to 15.53 percent from 14.49 percent recorded in June, with many analysts predicting it could hit 20 percent by the end of the year.
Prof Ndung’u said that the growth of broad money supply has been below its target since September 2010 which rules out demand pull inflation. He said part of the decision to hold the Central Bank Rate steady was to allow supply constraints to stabilize on their own.
“We want to observe how the economy responds and how the supply side sorts itself without bringing further confusion into the market,” he said.
Prof Ndung’u however raised concern over power rationing to industries saying it would negatively affect economic growth.