The Central Bank of Kenya (CBK) has announced significant measures aimed at bolstering the effectiveness of its monetary policy and enhancing the accessibility of financial facilities.
CBK announced the development in a statement issued on Thursday morning.
These moves, outlined in the White Paper on Modernisation of the Monetary Policy Framework and Operations, were approved by the Monetary Policy Committee (MPC) during its meeting on August 9, 2023.
To ensure a more seamless monetary policy implementation, the MPC introduced an interbank interest rate corridor centred around the Central Bank Rate (CBR), set at CBR± 2.5 per cent.
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This approach aligns with inflation targeting and is intended to ensure that the interbank rate closely follows the CBR, thereby facilitating better policy transmission.
"The Monetary Policy Committee (MPC) that met on August 9, 2023, considered and approved measures aimed at improving the monetary policy implementation framework and enhancing the transmission of monetary policy," the statement read.
"This is in line with the reforms outlined in the White Paper on Modernisation of the Monetary Policy Framework and Operations. Accordingly, the MPC approved measures based on inflation targeting and introduced an interbank interest rate corridor around the Central Bank Rate (CBR) set at CBR± 2.5 percent."
"Henceforth, the monetary policy operations will be aimed at ensuring that the interbank rate, as an operating target, closely tracks the CBR.," CBK said.
Under this framework, the CBK's open market operations will continue using a flexible rate fixed quantity approach.
This means that the CBK will control the liquidity injected or withdrawn from the banking system, while banks will have the liberty to bid or offer liquidity at their preferred bid or offer price.
Furthermore, the CBK has taken steps to enhance access to the Discount (Overnight) Window by revising the terms and conditions of the facility, effective immediately.
The interest rate applicable to this facility has been lowered from 600 basis points above the CBR to 400 basis points above the CBR.
Advances through this window will still be collateralized by the Government of Kenya securities, subject to a haircut of 10 per cent for Treasury bills and 20 per cent for Treasury bonds.
Notably, no additional administrative encumbrances will be attached to this facility.
"In addition, to improve access to the Discount (Overnight) Window, the Committee approved changes to the terms and conditions for the facility, and the changes take effect immediately. The applicable interest rate on the facility has been reviewed from 600 basis points above the CBR to 400 basis points above the CBR. As has been the case, advances through the window will be secured by Government of Kenya securities subject to a haircut of 10 per cent and 20 per cent for Treasury bills and Treasury bonds, respectively. No other administrative encumbrances will be attached to the facility," the statement read.
The objective of these changes is to reinforce the effectiveness of the interest rate corridor and amplify monetary policy transmission.
In a move to optimize investment efficiency in Government Securities, the CBK introduced the upgraded Central Securities Depository infrastructure, named DhowCSD, on July 31, 2023.
This advanced system revolutionizes investment in Treasury Bills and Treasury Bonds, enabling investors, including the Kenyan Diaspora, to engage in "anywhere anytime" transactions.
The improved infrastructure also promotes collateralized lending between commercial banks, fostering greater efficiency and reducing segmentation in the interbank market.
The CBK firmly believes that these measures will play a pivotal role in strengthening monetary policy transmission while simultaneously supporting the central bank's core objectives of ensuring price stability and a resilient financial system.
These progressive steps by the Central Bank of Kenya underscore its commitment to fostering a dynamic and responsive monetary policy framework, geared towards addressing the evolving needs of the Kenyan economy.
