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.
29th June, 2011 Haile Selassie Av P.O. Box 60000 - 00200 Nairobi, Kenya Telephone: 2860000, Fax: 340192 BANKING CIRCULAR NO. 5 OF 2011 TO ALL CHIEF EXECUTIVES OF COMMERCIAL BANKS FURTHER TIGHTENING OF MONETARY POLICY STANCE VIA ACTIVE LIQUIDITY MANAGEMENT TO REIN IN INFLATIONARY EXPECTATIONS The principal objective of monetary policy is to achieve and maintain stability of the general price level. Over the last three months, the Central Bank of Kenya (CBK) has been implementing a tight monetary policy stance to rein in inflation and curb inflationary expectations as well as stabilising the exchange rate. The CBK has also been reviewing the use of alternative tools to further enhance the effectiveness of its monetary policy. However, inflationary expectations have given rise to some persistent instability which requires immediate action through robust liquidity management. Furthermore, there is need to minimise arbitrage activities in the interbank market. The CBK has therefore revised the rules that guide the operations of the CBK Discount Window.
Up until now, the Central Bank Rate (CBR) which is the minimum interest rate charged on loans to commercial banks has been the operative rate through the CBK Overnight Discount Window. This will cease forthwith. Henceforth, the operational interest rate for the CBK Discount Window will be reviewed from time to time and posted on the CBK website on a daily basis by 9.00 am. In this regard, with immediate effect, the initial accommodation through the CBK Discount Window will be 8.00 percent. In addition, use of funds from the CBK Overnight Window to trade in the interbank market or for trading in foreign exchange is not allowed and stiff penalties will be imposed on banks that engage in these activities.
These measures will be implemented by the CBK with immediate effect. This further tightening of the monetary policy stance will curtail second round effects arising from fuel and maize prices and exchange rate volatility that have been fueling inflationary expectations.
JACKSON M. K
MANAGEMENT DEPARTMENT DIRECTOR, BANKING SERVICES, NATIONAL PAYMENT SYSTEMS & RISK