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CBK on course to level interbank rate with Central Bank Rate to ease cost of credit

A sign at the Central Bank of Kenya building in Nairobi. (Photo: Handout)

By Alfred Onyango | Monday, June 10, 2024

As part of new reforms, the Central Bank of Kenya says interbank lending rates are expected to stay under 1.5 per cent of the current Central Bank Rate (CBR), up from 2.5 per cent.

Kenya's apex bank has tightened the gap between the interbank rate, the interest charged on short-term loans between banks, and the benchmark Central Bank Rate (CBR) in order to align them, pointing at the reduced cost of credit in the economy.

As part of new reforms, the Central Bank of Kenya says interbank lending rates are expected to stay under 1.5 per cent of the current CBR, up from 2.5 per cent.

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This means the interbank rate will now hover between 11.5 and 14.5 per cent with the guidance of the CBK.

Further, the discount window rate, the rate at which banks can borrow from CBK as a last resort after exhausting all the other avenues, including borrowing from different banks, has been lowered to three per cent above the CBR, from four per cent.

This means banks borrowing from the CBK overnight facility will see an interest charge of up to 16 per cent. Previously, it was up to 17 per cent.

A new policy framework creating the two restrictions was authorised by the top bank last year to decrease interbank market inefficiencies, particularly size-based bank segmentation.

It currently perceives more opportunities to enhance interbank operations and the dissemination of its interest rate determinations.

According to the CBK, "The [Monetary Policy Committee] MPC reviewed and approved a recommendation to review the width of the interest rate corridor around the CBR from the current 250 basis points to 150 basis points to enhance the effectiveness of the monetary policy implementation framework."