Kenyan Central Bank to Turn Interbank Rate Into Signaling Tool

The Central Bank of Kenya plans an interest rate corridor in which interbank borrowing costs will be more closely aligned to its benchmark rate to help narrow the wide spreads that characterize the market, Governor Patrick Njoroge said.

“We will have a signal rate, the CBR, which will anchor all interest rates,” Njoroge told reporters Wednesday in the capital, Nairobi. “But a good indicator of whether that rate has transmitted itself to the economy would be the interbank rate.”

The interbank rate, the rate at which banks lend to each other, declined to an average 4.453 percent on Wednesday from as much as 26 percent in September. Some banks paid 8 percent for funds on Wednesday, while others were charged only 3 percent to access financing in the same market, according to central bank statistics. The central bank has maintained the CBR at 11.5 percent since July.

The majority of lenders in East Africa’s biggest economy are starved of liquidity as only seven of the nation’s 42 institutions hold 80 percent of the system’s cash, he said. The central bank rate and the interbank rate would be more correlated if liquidity was better distributed, Njoroge added.

The central bank will use its open market operations, such as repos and reverse repos, to manage liquidity in the market, Njoroge said.

“The interbank is not open to all the banks,” Aly Khan Satchu, CEO of Nairobi-based Rich Management, said in a phone interview. “Currently the interbank appears to be a two-tier market, where there is a tier one market and then there is everyone else.”

The interest rate corridor, when it is operational later this year, will be the central bank’s second attempt at managing rates in the interbank market, Njoroge said. The nation abandoned an earlier framework that failed to transmit policy decisions effectively.

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