Recent data from the Central Bank of Kenya (CBK) reveals a substantial uptick in the interbank lending rate, reaching a near five-month high as the CBK enforces a more robust monetary policy. The mean lending rate between banks stood at 14.3 percent on January 2, 2024, representing the highest level since August 7 and at 13.424 as of 5th January 2024. This is following the CBK’s decision on December 5 to raise the Central Bank Rate (CBR) from 10.5 percent to 12.5 percent.
This surge in the interbank lending rate, previously at a low of 10.39 percent, indicates the immediate impact of the higher benchmark rate. The overnight lending facility for banks has become more costly, reflecting the broader trend of rising long-term interest rates and subsequently affecting borrowing costs for bank customers.
To enhance monetary policy transmission, the CBK introduced an interbank interest rate corridor around the CBR on August 10, setting a range of 2.5 percent above or below the prevailing benchmark lending rate. This move effectively places interbank lending rates under the control of the CBK, enabling the apex bank to influence lending rates by adjusting its monetary stance.
The current framework emphasizes aligning the interbank rate closely with the CBR, ensuring it does not fall below 10 percent or rise above 15 percent. The recent spike in the CBR and interbank lending rate is part of the CBK’s strategy to stabilize the local currency and anchor inflation expectations, with the CBR reaching its highest level in over 11 years last month.
Anticipated to fluctuate between 10 and 15 percent, the interbank lending rate is set to have repercussions for borrowers, signaling an imminent rise in the cost of credit. As financial institutions adapt to these changes, stakeholders are vigilantly observing the evolving economic landscape and its potential implications for borrowing and lending activities.
By; Montel Kamau
Serrari Financial Analyst
8th January, 2024
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