High liquidity within the local money market may impact CBK’s position in the lending policy rate to retain it at the current base of seven percent.
As per the revelations, economists at NCBA reveals the weak demand for the shilling eliminates pressure on the inflation rate. However, the analysts predict the high liquidity will likely affect the monetary policy decision.
“On the monetary front, the Central Bank may keep rates on hold, as it struggles with excess liquidity. This is despite well-anchored inflation expectations thanks to lethargic credit-market induced demand slack,” reads NCBA’s June economic report.
Typically, the high liquidity would tighten the base lending rate or increase CBK’s cash reserve ratio for banks.
The CBK happened to lower the cash reserve ratio to 4.25 percent in March, allowing banks to cushion borrowers. This is despite the CBK cutting its lending rate in four successive sessions from September 2019 and April to spur private sector lending.
The high liquidity in the money market was evident in the auctions of government securities. The Sh40 billion 5-year and 10-year bond auction would attract Sh105.1 billion worth of subscription. The Treasury bill auction hit an oversubscription of Sh45.2 billion for its three tenors.