CBK Urged to Tighten Monetary Policy

Business Daily (Nairobi)

Geoffrey Irungu

22 June 2011

Traders in the money market are borrowing cheaper cash from the central bank and lending it back to the government at a higher rate – thereby cashing in on the differences between the central bank rate (CBR) and the rate of Treasury bill, one of the instruments used by the state to borrow from the public.

To stop the practice – technically called arbitrage – the Central Bank of Kenya needs to tighten the monetary policy stance by raising the policy rate (also called CBR), Razia Khan, head of Africa research at StanChart in London, said on Wednesday during a visit to Nairobi.

The arbitrage is based on the fact that the central bank rate (CBR) is at 6.25 per cent while the 91-day treasury bill rate is as high as 10 per cent, showing that a trader gains almost four shillings out of every hundred lent to the government.

A tightening would also prevent further fall of the exchange rate which is currently the main cause of rising inflation apart from the supply side shocks relating to the prices of international commodities and food, said Ms Khan.

“Fundamentals indicate that there is really no good reason for the local currency to depreciate to the extent it has in the past few months. But market psychology is such that it has come to expect an increasingly weaker shilling, sustaining the momentum in the currency fall,” Ms Khan said.

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