CBK sets tough terms for banks with a strong signal of high rates

The cost of borrowing is set to rise following the move by the Central Bank of Kenya to raise the rate at which it lends money to commercial banks from 6.25 per cent to 8 per cent.

Commercial banks borrow from the Central Bank through the so-called central bank rate (CBR) overnight window. Wednesday’s increase in the CBR to 8 per cent was the strongest signal so far to commercial banks that Central Bank wants lending rates to start moving upwards.

With the latest statistics showing that inflation had accelerated to 15 per cent – and with volatility of the shilling persisting longer than had been predicted – it is clear that the Central Bank has been forced into action in the hope that this will stabilise the exchange and ebb inflationary pressures.

In a statement, the director of banking services, Mr Jackson Kitili, explained that the move was also meant to stop banks from the practice of borrowing from under the CBR window at 6.25 per cent and then making huge profits by lending the same money to the government through Treasury Bills at the much higher interest rate of 9 per cent.

Concern has been growing at the CBK that commercial banks were engaging in “arbitrage’ – or borrowing through the CBR window and using the money to purchase foreign exchange – thus adding to the pressures on the shilling. “There is need to minimise arbitrage activities in the interbank market,” said Mr Kitili.

Contrary to past practice where the CBR rate was only reviewed quarterly and announced after meeting of the Monetary Policy Committee, Mr Kitili said that the interest rate for the CBR discount window would be reviewed regularly and posted on the CBK website daily by 9am.

He announced that commercial banks would not be allowed to use of the funds borrowed from the CBR window to trade in the interbank or foreign exchange markets. “Stiff penalties will be imposed on the banks that engage in such activities,” he warned, adding tightening the monetary policy stance would curtail second-round effects arising from fuel and maize prices and exchange rate volatility that have been fuelling inflation.

But analysts were quick criticise the decision to review the CBR on a daily basis, charging that it would create uncertainty and instability. “If it was fixed weekly, that would have created stability. The daily window rate sounds like a joke to me,” said the analyst who spoke on condition of anonymity because he is not mandated to speak on behalf of his organisation.

Analysts said banning banks from investing money borrowed from the CBR window in interbank and forex as micro-management which would be impossible to implement. “How can they tell which shilling is from the CBR window and which is from normal deposits?” said the analyst.

Mr Habil Olaka, the Kenya Bankers Association chief executive officer, said the move showed the bank had realised that it was no longer feasible to wait for the two months for the Monetary Policy Committee to review the rate.

As the CBK announced the new move, latest figures from the Kenya National Bureau of Statistics, showed that inflation rate increased for the eighth month in a row to 14.49 per cent in June from 12.95 per cent in May, driven higher by food prices.

The shilling Wednesday strengthened to 89.70 per dollar from 90.33 after CBK’s statement. “I don’t think inflation is stabilising any time soon because it is not monetary policy driven as the government and Central Bank of Kenya want us to believe,” said former Mandera Central MP Billow Kerrow. “CBK cannot talk about economic growth when the weakening shilling is dampening it.” He termed CBK’s non-intervention stance on the shilling as “baffling”.

Commercial Bank of Africa has said it would interest on loans in Kenya shillings from 13 to 14.5 per cent, while I&M Bank would raise it from 13.5 per cent to 15 per cent.