Commercial banks will be required to pay more for every penny they borrow from the Central Bank of Kenya (CBK) following a decision by a key advisory organ - Monetary Policy Committee - to raise a monetary tool used to control money supply in the economy.
The move may signal an imminent reduction in the amount of money doing circulation in the economy and a possible rally in interest (borrowing) rates.
In addition, CBK — which is the lender of last resort to commercial banks — will in the coming months make it clearer to financial institutions what adjustments of any financial control instrument is meant to signal whenever any such changes are made.
These are some of the outcomes of an important meeting called to chat the way forward over raging inflation and increased volatility of the foreign exchange market that has seen the shilling hit record breaking lows against the dollar in the recent weeks.
MPC — the body that advises the governor on money supply matters — Wednesday played along the sentiments expressed by across section of economists in the last couple of weeks by raising Central Bank Rate (CBR) to seven per cent from 6.25 per cent last month, the highest increase since the rate was introduced in 2006.
The MPC decision means that it will be more expensive for banks to borrow from the CBK, a development that is bound to see commercial banks shy away from using the facility in the process reducing money supply in the economy and tame inflation induced by increased money supply.
The move also means that financial institutions that will borrow from CBK will be staring at higher interest rates, meaning that any consumer who borrows from such institutions will bear higher interest rates.
"MPC believes that with these measures and others which are ongoing in liquidity management, the economy will be cushioned from inflationary pressure and domestic prices stabilised while providing a flexible space for banks to manage their liquidity efficiently," said a statement signed by CBK governor Njuguna Ndung’u, who chairs the committee.
On taming erratic volatility of the foreign exchange, the MPC endorsed a recent decision by Finance minister Uhuru Kenyatta to seek more dollars from the International Monetary Fund to raise the import cover and stabilise dollar demand.
