CBK Raises Overnight Rates And Bans Arbitrage

Business Daily (Nairobi)

Geoffrey Irungu

29 June 2011

Central Bank of Kenya (CBK) has banned commercial banks borrowing cheaply using its emergency overnight window and lending to each other at a higher rate.

CBK said it would take action against any bank profiting from the interbank arbitrage as it raised the central bank rate – the overnight borrowing window – by 1.75 percentage points to 8.00 per cent.

The CBK move is expected to strengthen the exchange rate as more dollars flow to take advantage of higher interest rates and thereby curb the inflation that rose to 14.49 per cent in June.

The mounting differences between the CBR at 6.25 per cent and interbank – through which financial institutions lend to each other overnight – that had risen to as high as 8.00 per cent in some transactions had created arbitrage opportunities for banks to the tune of 1.75 per cent.

A bank could therefore borrow at the CBR and lend to another distressed bank at 8.00 per cent making Sh1.75 for every Sh100 lent. CBR was last at 8.00 per cent in May 2009.

The central bank has also suspended the operations of the CBR and come up with what it called a CBK Discount Window that will move in line with market expectations such that the operative rate will be posted every working day at 9.00 am.

Thus this will become the new emergency window showing that the CBR is only being converted into a daily rate rather than a rate that is reviewed every two months as previously.

“Henceforth, the operational interest rate for CBK Discount Window will be reviewed from time to time and posted on the CBK website on a daily basis by 9.00 am. In this regard, with immediate effect, the initial accommodation through the CBK Discount Window will be 8.00 per cent,” Jackson Kitili, director of banking services and national payment system, said in a circular to the CEOs of commercial banks.

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