High liquidity cuts interbank rate

Ample liquidity in the banking system has pushed down the rate at which the lenders borrow from each other on emergency basis by two percentage points in the past month, and also heralded higher demand for short-term government securities.

Central Bank of Kenya (CBK) data shows the interbank rate came down to 3.5 percent at the end of last week, a level last seen in mid-January.

Lending volumes have also come down in recent trading days, averaging Sh5.8 billion per day in the first week of March, down from Sh15.7 billion daily in the last week of February.

The high liquidity has translated into huge bids on short-term government securities.

The Treasury bill auction last week attracted bids worth Sh46.8 billion against the advertised Sh24 billion, a trend that analysts say is expected to continue for the remainder of this month.

“In March we expect the T-bills to be oversubscribed owing to high market liquidity and high demand for the short-term papers,” said analysts at investment bank Sterling Capital in a fixed-income note.

Since the beginning of February, the government has received a total of Sh282.8 billion in Treasury bill bids from the market in six auctions (average of Sh47.1 billion per auction), in turn accepting a total of Sh160.5 billion.

The bond sale in February did not do as well, despite the liquid market hurt by the long tenor that went against investor sentiment that is biased towards shorter securities.

Investors offered Sh42.5 billion for the Sh50 billion 15- and 25-year paper, with the State taking up Sh27.9 billion. This month, the government has floated a 20- and 25-year paper for the same amount.

The ample liquidity is also good news for smaller lenders who often struggle for liquidity, which is concentrated in tier one banks.

For CBK, however, excess liquidity has the potential to make the exchange rate volatile, hence it is mopping up the excess cash through short-term repurchase agreements (repo).

Monday, the CBK said that there was excess liquidity, and thus took out Sh15 billion through a seven-day repo at 4.5 percent (the maximum rate is pegged on the CBR), where banks offered Sh41.8 billion.

It helped the shilling gain marginally against the dollar, trading at an average of 102.70 units in the afternoon having opened the day at an average of 102.89.