Regulatory Alerts2011-06-29
Banking Circular No 5 of 2011 - Further Tightening of Monetary Policy Stance Via Active Liquidity Management to Rein in Inflationary Expectations
This Banking Circular issued on 29th June 2011 by the Central Bank of Kenya (CBK) outlines further tightening of monetary policy to tackle inflationary expectations. The primary goal is maintaining price stability. Over the last three months, CBK has been implementing a tight stance through liquidity management and reviewing alternative tools. However, persistent inflationary expectations necessitate immediate action via robust liquidity management. The CBK also plans to minimize arbitrage activities in the interbank market by revising its guidelines on operations of the CBK Discount Window. From this point forward, the Central Bank Rate (CBR) will no longer serve as the operational rate for the CBK Overnight Discount Window. Instead, the operational interest rate will be reviewed periodically and announced daily. The initial accommodation through the CBK Discount Window has been set at 8%. Banks are prohibited from using funds from the window to participate in interbank market or foreign exchange trading, with severe consequences for those who do not adhere to this rule. These measures will take effect immediately, with the intention of curtailing second-round effects fueled by inflationary expectations caused by factors like fuel and maize prices and currency fluctuations.