CBK releases Sh16 bn into the market to stabilise interest rates

Kenya’s Central Bank has injected Sh16 billion ($153.98 million) into the economy in a bid to lower the cost of borrowing that has left the banking industry facing mass defaults.

The money was injected through reverse repurchase agreements (repos) on November 5, as the industry regulator bought securities from commercial banks with an undertaking to sell them back.

Market analysts said the move is meant to cautiously improve cash flow in the banking industry in a bid to influence interest rates without hurting the exchange rate and inflation.

“CBK has actually been buying instruments from banks in order to inject liquidity.  What they are trying to do is a clear signal that they are trying to  influence the interest rates to a reasonable level without destabilising the forex market and reviving inflationary pressures,” said Francis Mwangi, head of research at Standard Investment Bank.

“Ideally, CBK is supposed to be in the repo market when the market is dry with no liquidity, but they could be doing this now because of the small banks that are facing liquidity challenges,” said Eric Munywoki, research analyst at Old Mutual Securities Ltd. “Small banks may be having challenges to borrow from the interbank market because of what happened with Imperial Bank and because some banks don’t have confidence in them.”

Kenya’s central bank recently placed Imperial Bank under receivership over “unsound business conditions.”

Interest rates in Kenya had risen to worrying levels leaving commercial banks counting paper losses on their bond holdings, and borrowers struggling to service their loans.

READ: CfC study shows private sector to cut production as rates increase

The equity market has seen investors dump shares in favour of the Treasury bond market.

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SOURCE: BUSINESS DAILY