Interbank rates tipped to fall on old notes mop-up

The elevated bank-to-bank lending rates are likely to be temporary as demonetisation has injected significant amounts of cash into the financial markets, Standard Investment Bank (SIB) said.

SIB said the interbank rates would likely fall considering that the Central Bank of Kenya (CBK) will probably ease off on the current mop-up of liquidity.

Demonetisation saw Sh1,000 notes worth Sh209.6 billion exchanged for the new generation ones by the end of last month.

“Our view is that the upward trajectory being witnessed in the money markets is short-term in nature.

“As the data demonstrates, the CBK is the primary enabler of the uptick, however, we believe that it will taper off the mop-ups in the near term,” said SIB.

“The regulator has still been active in the month of October in what we interpret as spillover effects of the demonetisation exercise, nevertheless, we expect this to dampen in the near term.”

SIB says that demonetisation and its massive cash injection into commercial banks is the pretext for the frequent mop-up that has seen nearly Sh100 billion removed from the market in a matter of months.

The investment bankers said the other factor that would have increased liquidity in the financial system are government payments but these have been limited.

“Given that government disbursements — which are largely the biggest injectors of liquidity in the banking system — have been subdued since the GoK fiscal year started in July, we reckon that the demonetisation exercise (which began in June) is the pretext behind the mop-ups,” said SIB.

The mop-ups are also intended to ensure stability of the Kenya shilling and also limit inflationary pressures.

“The regulator has been aggressively mopping up liquidity from the market since June 2019, in what we infer as an attempt to cushion volatility in the foreign exchange market and inflationary pressures in the economy,” said SIB.

The investment bankers further said that limited redemptions in government paper to the tune of Sh122.6 billion compared to Sh220.4 billion in the fiscal year that ended in June are also likely to ensure that there is minimal refinancing risk for the Treasury in the course of the year to next June.