By JAMES ANYANZWA

Central Bank has removed Sh40.2 billion worth of excess liquidity from the money markets in a bid to control inflation.

The surplus cash fuelled by increased government spending has also seen interbank rates and Treasury bill rates crash.

Though increased government spending is critical in spurring economic activities, excess money supply in the economy creates the danger of inflation.

The unfolding events come after the National Treasury released Sh16.4 billion for the county governments and further unlocked funding for the operations of key ministries including payment for teachers.

Head of Asset and Liability Management at the Treasury Division of the Kenya Commercial Bank (KCB) Peter Njuguna attributed the excess liquidity to increased spending by the government.

 “I think they (CBK) are concerned that excess liquidity actually could trigger inflationary pressures,” he told The Standard.

The term “excess liquidity” may refer to the share of liquid assets in bank portfolios or to money holdings of the nonbank public.

According to CBK’s weekly economic report the money market was relatively liquid during the week ending September 11, 2013.  The average interbank rate declined by 121.6 basis points to 6.46 per cent from 7.67 per cent in the previous week while average interbank volumes transacted fell to Sh11.5 billion from Sh15.7 billion in a similar period.

Treasury bills

During the period under review the government offered for sale Treasury bills worth Sh9 billion but a total of Sh14.9 billion was accepted out of Sh29.2 billion bids received.

 Weighted average interest rates on the 91-day, 182-day and 364-day Treasury bills declined by 69.3 basis points, 37.1 basis points and 64.6 basis points, respectively, to reach 9.2 per cent, 10.08 per cent and 10.75 per cent, during the week’s auction.

 “The Central Bank’s open market operations resulted in liquidity withdrawal of Sh40.2 billion during the week,” says the report.

 Reserve money averaged Sh288.9 billion during the week and was Sh1.4 billion above target.

Commercial banks recorded surplus of Sh2.36 billion in their settlement accounts in relation to monthly average cash reserve requirement of 5.25 per cent (Sh93.3b) at Central Bank compared to Sh26.78 billion in previous week.