The latest effort by the Central Bank mirrored to address the tightness of liquidity strains in the banking system due to slow foreign budgetary inflows compared with historical performance.
It comes as concerns mount in the largest commercial banks that most of the banks were experiencing liquidity strains due to the new government drastic action to tighten monetary policy of transferring of public institutions’ deposits from the commercial banks to the Central Bank.
The latest BoT Monetary Policy Statement for February 2017 says that the bank also granted some loans to banks as a lender of last resort and as a result, the overnight interbank cash market rate declined beginning October 2016 through December 2016 and stabilised at around 13.7 percent, which is closer to the 12-months average of about 13 percent.
The report said that the tight liquidity situation, particularly in the first three months of 2016/17, was also mirrored in the general rise of the rate at which commercial banks lend cash to each other overnight to an average of about 16.15 percent in September 2016 from 12.76 percent in June 2016.
However, the liquidity situation improved subsequently following sizable liquidity injection through reverse repos, purchase of foreign exchange, foreign exchange swaps.
“Throughout the period, the Bank closely monitored key monetary indicators to ensure that liquidity remained at the appropriate level to support demands of various activities in the economy, while safeguarding stability of money market interest rates and inflation,” said the report.
Despite the policy actions taken to inject liquidity, average reserve money remained below the targeted path.
The impact of the sustained lower levels of average reserve money on the broader monetary aggregates was partly dampened by a general increase in money multiplier associated with increased use of mobile phone payment system and improvement in financial services delivery and products.
The sustained moderate growth rate of average reserve money, led to a deceleration in the growth of broader monetary aggregates, with the growth of extended broad money supply and credit to the private sector slowing down to 2.9 percent and 7.2 percent, respectively in the year ending December 2016 from 12.5 percent and 19.1 percent in the year ending June 2016.
BoT said that it elevated cautiousness to lending which has been associated with the increase in non-performing loans also contributed to the slowdown in the growth of monetary aggregates.
The value of the shilling against the US dollar sustained a notable stability throughout the first half of 2016/17, consistent with monetary policy stance and the improvement in the current account.
It said following cautious implementation of monetary policy, enhanced government expenditure management and revenue efforts, the end December 2016 quantitative assessment criteria under the Policy Support Instrument (PSI) Programme with the IMF on average reserve money and accumulation of net international reserves were met with comfortable margins.