Central Bank
of Kenya (CBK) has reviewed the rate at which commercial banks borrow overnight to offset their daily obligations at the clearinghouse by 509 basis points.
Monday the banking regulator increased its lending rate at the CBK Discount Window to 11.34 per cent from 6.25 per cent.
Contrary to the central bank rate, which is often fixed by the bank’s monetary policy committee after every two months, the operational interest rate for the CBK Discount window is reviewed from time to time and posted on the CBK website on a daily basis by 9.00 am.
The new measures are meant to fight inflation and stabilise the deteriorating value of the shilling with a view of rebuilding confidence in the economy.
Central Bank contends that by revising the rules guiding the operations of its Discount Window would curtail the second round effects arising from fuel prices and exchange rate volatility that have been fuelling inflationary expectations.
Last week, the Bank further tightened the rules governing the use of its overnight credit window as the banking regulator moved to rein in inflation and curb persistent volatility in the foreign exchange market.
Under the new regulations, the banking regulator said any commercial bank lending in the interbank market would not be allowed to access funds through the CBK Discount window on the same day.
Similarly any bank borrowing from the CBK Discount window is prohibited from lending in the interbank market either on the day of accessing the window or on the following day.
In a circular to the chief executives of all commercial banks released on Friday the regulator said interest rate to be charged at the CBK Discount window would be calculated based on a certain formula.
Consequently, the interest rate at the CBK Discount Window would be derived as Central bank rate (CBR), which is currently at 6.25 per cent, plus the previous day’s average interbank rate minus the CBR plus a penalty of three percentage points.
FOREIGN EXCHANGE
However, when the interbank rate is equal to or below the CBR the applicable rate on the CBK Discount (Overnight) window will be the CBR plus three percentage points.
The new guidelines, which took effect yesterday, also stipulates that central bank considers an individual bank’s foreign exchange trading behaviour over the previous four trading days in determining eligibility for access to the CBK Discount Window. As at July, inflation rate stood at 15.53 per cent from 14.49 per cent in June.
