The money market is where financial instruments with high liquidity and very short maturities are traded. The maturities usually range from overnight to just under a year. Among the most common money market instruments are eurodollar deposits, negotiable certificates of deposit (CDs), bankers acceptances, Treasury bills, commercial paper, municipal notes and repurchase agreements (repos).
Falling Interbank rate between January and June 2017 is indicative of increased liquidity in the market. The money market was liquid during the week ending July 7, 2017, largely attributed to increased government payments at the end of the financial year. However, the money market was fairy tight during the week ending July 14, 2017, reflecting liquidity withdrawals through Central Bank’s open market operations, driven by the need to control inflation. By close of the week, the weighted average interbank rate remained stable at 7.2 percent compared to 5.9 percent recorded in the previous week.
The Kenya Shilling exchange rate revealed mixed performance against major international and regional
currencies during the week ending July 14, 2017. It stabilized against the USD but changed marginally against the Sterling Pound and the Euro. The Kenya Shilling has remained stable over the last twelve months and changed marginally against the US Dollar index (USDX). The USDX is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners’ currencies. It is a weighted geometric mean of the dollar’s value relative to other select currencies, namely: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona and the Swiss franc.
At the close of the week ending July 14, the Shilling slid to 104.02 against the US Dollar following increased dollar demand by oil marketers, food importers and firms looking to pay dividends to foreign investors as the financial year come to an end. Weaker economy and political uncertainty due to the coming general elections are among the factors putting pressure on the Kenyan shilling. This is feared to have a pass through effects on inflation that is already above the upper limit of statutory target band of 2.5—7.5 per cent at 9.2 per cent for the month of June.
Given that the country’s manufacturing industry relies directly on imported inputs, stability in the exchange rate against the USDX and other global currencies is important in maintaining stability in domestic prices as well.
The Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate means that banks are getting money at a cheaper rate, and vice versa. An increase in the repo rate implies existence of a liquidity crunch in the market. The reverse repo rate on the other hand is the rate at which the banks park surplus funds with reserve banks, usually done when there is surplus liquidity in the market.
The fall in repo rate between March and May 2017 reflects gradual rise in liquidity in the interbank market. However, the rise in the repo rate from the first week of July 2017 is an indication of tightening monetary policy stance to curtail the increase in inflationary pressure in the economy.