Inter-bank lending rate soars to 6.3pc on tightening liquidity
Kenyans may face difficult times this year as lenders prepare to adjust loan interest rates to reflect the revised Central Bank of Kenya (CBK) base lending rate.
The banking sector regulator raised its benchmark rate to 8.75 per cent during its latest Monetary Policy Committee (MPC) meeting for the second time since May to hedge the economy’s exposure to rising inflation and global risks.
This effectively means that loans and mortgages will be more expensive beginning in January when commercial banks adjust their reference rates to reflect the new CBK base lending rate.
Already feeling the pinch are smaller banks with liquidity in the interbank market tightened, raising the cost of money.
Small banks with less deposits tend to borrow funds more from larger banks to meet their immediate needs, but with rising interbank interest rates, they could suffer losses if the rate hikes continue to tick up.
Central Bank data shows that interbank rates, which is the interest rates at which banks borrow money from each other, rose from 5.9 per cent the previous week to 6.3 per cent last week.
“Liquidity in the money market decreased during the week ending January 26, as tax remittances more than offset government payments,” the regulator said.
Commercial banks’ excess reserves stood at Sh2.9 billion in relation to the 4.25 per cent cash reserves requirement. Open market operations remained active.
Interbank deals
“During the week, the average number of interbank deals increased to 30 from 26 in the previous week, while the average value traded decreased to Sh15.5 billion from Sh18.3 billion in the previous week,” said CBK.
The tightening liquidity reflects the rising interest rate environment with CBK raising CBR rates to 8.75 per cent and its discount window to 14 per cent forcing banks to access funds from each other.
Interbank rates had been trending at four per cent towards the end of last year but had risen sharply since the beginning of January this year.
