NAIROBI, Kenya, Jun 29 – The Central Bank of Kenya (CBK) on Wednesday moved to tame the runaway inflation, raising by 175 basis points the rate at which banks borrow from it to meet temporary shortages of liquidity.
In a circular, CBK informed all Chief Executive Officers of commercial banks that the CBK Overnight Discount Window had been increased to eight percent and would be reviewed on a daily basis depending on the liquidity in the market.
Ã¢â‚¬Å“In this regard, with immediate effect, the initial accommodation through the CBK Discount Window will be eight percent,Ã¢â‚¬Â the statement signed by Director of Banking Services Jackson Kitili read.
This means that the overnight rate will be higher than the base lending rate the (Central Bank Rate, CBR), which remains at 6.25 percent.
Ã¢â‚¬Å“Up until now, the CBR which is the minimum interest rate charged on loans to commercial banks has been the operative rate through the CBK Overnight Discount Window. This will cease forthwith,Ã¢â‚¬Â Mr Kitili stressed.
The move is one of the instruments that CBK is using to try and reduce the amount of money in supply by making it expensive for banks to borrow money from Central Bank for onward lending.
This is also expected to rein in the skyrocketing inflation which in June rose to 14.49 percent on account of high food prices. Analysts have projected that if nothing is done to tame it; inflation might in a few months peak at 22 percent.
But the Central Bank whose Ã¢â‚¬Ëœhands-offÃ¢â‚¬â„¢ stance has been termed by many as disappointing has continued to maintain that it is on top of things through the use of various alternative tools to further enhance the effectiveness of the monetary policy.
These measures are also expected to be reflected in a stable exchange rate, which has been depreciating in the last few months. On Wednesday the shilling gained some ground and closed at 89.85 against the dollar.
There have been suspicions of arbitrage activities which have contributed to the plummeting shilling which forced Governor Prof Njuguna NdungÃ¢â‚¬â„¢u to take unnamed regulatory action against the speculators last week.
And in a bid to curb speculation and ensure that banks do not abuse any of the loopholes in the market going forward, the CBK has banned the use of funds from the overnight window to trade in the interbank market or in forex trading.
Ã¢â‚¬Å“Stiff penalties will be imposed on banks that engage in these activities,Ã¢â‚¬Â Mr Kitili warned.
The Central Bank hopes that by further tightening its monetary policy stance, it will manage to curtail the second round effects of rising food and fuel prices and the weakening currency which have been responsible for the current inflationary pressures.