Banks lent to each other at an average interest rate of 3.77 per cent on June 3, indicating a continued declining trend since May, driven by increased liquidity and high diaspora remittances.
Data from Central Bank of Kenya show the interbank rate was on a high of 6.25 per cent and low of 3.0 per cent, compared to the daily average interest rate of 4.08 per cent on May 31.
The average number of interbank deals were recorded at 16 compared to 12 the previous day, while the volume traded increased to Sh9.75 billion from Sh8.5 billion.
This marked the first business day since Central Bank's governor Patrick Njoroge announced demonetisation of old currency notes causing need to replace the new notes.
Even though the decline on interbank rate may be provisional, financial risk management expert Mihr Thakar says surplus liquidity is likely to be re-injected into the system with this demonetisation, in addition to the already soaring diaspora remittances.
“As an effect, we may see a lot of speculative forex trading, although the CBK may use repos to mop up liquidity,” Thakar said in a statement to the Star.
He added that private sector credit growth may also experience a short-term recovery due to an increase in bank deposits.
The daily interbank rate has been on a declining trend due to improving liquidity on banks' excess reserves and remittances.
The rate was on average of 5.54 per cent in May and 5.9 per cent in April where it pointing to tightened liquidity conditions in the money market and need for lenders to mobilise money at the time. It was marked at a low of 2.6 per cent in March.
In May 30, foreign exchange reserves surged by 26 per cent to an all-time high of Sh10.06 billion ($10,062 million) attributed to the issuance of government issuance of Sh210 billion ($2.1 billion) Eurobond and diaspora remittances.
Central bank's weekly bulletin showed the 6.4 months of import cover grew compared to the previous week's 5.08 months import cover of Sh7.98 ($7,981million).
In the five months to May, diaspora remittances grew to Sh113.29 billion ($1132.91 million) compared to Sh111.23 billion ($1112.33 million) same period last year.
According to market analyst, MoneyAcademyKe on twitter, Central Bank has provided enough time to avoid a possible cash shortage which would otherwise see other economic factors crumble.
Kenyans have until October 1 to return the older old notes.
