By Morris Aron

The Central Bank of Kenya (CBK) said it is optimistic interest rates will drop soon following its decision to cut the cash reserve ratio and the Central Bank Rate (CBR).

The move, the bank said, will ensure bank customers benefit from directives aimed at addressing liquidity.

Prof Njuguna Ndung’u, the CBK governor said the bank had identified a number of hitches in the financial market blocking monetary policy incentives on liquidity from trickling down to the end-consumer.

"We are working on modalities to address market hitches that will see not only banks benefit the reduction of rates but also customers," said

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Ndung’u.

Among the measures CBK is considering include the tightening of the gap between lending and the deposit rate that, so far, has remained at about 9 per cent despite its interventions.

CBK Governor, Prof Njuguna Ndungu says the regulator will find a solution to high interest rates. Photo: File/Standard

Last week, the bank’s policy committee cut the CBR to 7.75 per cent and reduced the cash reserve ratio to 4.5 per cent.

The bank also called on financial institutions to take advantage of its decision to extend the maturity period from five days to seven days for banks to borrow from each other using treasury bonds and bills as security.

Window extended

Recent statistics indicate that only 12 of the 45 banks had taken advantage

of the extended window period— also called the repurchase agreement or repo to alleviate liquidity.

Ndung’u said the poor response was due to lack of information about the facility’s legal and technological framework and mode of evaluating

interest earnings. Banks, on the other hand, said the CBK’s move comes at a time when they are ‘are awash with idle cash.’

The monetary regulator said it will encourage regular

discussions with financial institutions and the private sector to iron out thorny market factors blocking

interest rates benefits.

"We will regularly be meeting with the other stakeholders to come up with solutions which will result in low lending rates," said Ndung’u.

Other incentives include luring banks into trading in bonds, making the yield curve more predictable and

accurate and structural adjustments at Kenya National Bureau of Statistics to ensure timely delivery of reliable economic data.