The IMF recently released a report titled “Monetary Policy Implementation and Volatility Transmission along the Yield Curve: The Case of Kenya”. In this report, the IMF looks at the evolution of the monetary policy framework favoured by the Central Bank of Kenya, reports on the large and persistent deviations of the overnight interbank rate from the Central Bank Rate (the policy rate) in recent years, and provides reasons for these deviations, for example as a result of government fiscal pressures and foreign exchange interventions by the CBK.
It also studies the impact of these large and persistent deviations in the interbank rate around the policy rate, indicating that it is these deviations which result in increased variance in domestic yields. As a result, the IMF encourages the Central Bank of Kenya to commit to the use of the interbank rate as an operational target, and encourages the management of volatility around this operational target using existing policy tools as a means of reducing volatility in short term domestic yields.
The paper analyzes the transmission of changes in the policy rate to the interbank interest rate and assesses the degree to which volatility in overnight interbank rates affects volatility in other maturities in Kenya relative to a sample of seven IT countries, namely Ghana, Hungary, Poland, South Africa, Sweden, Thailand, and Uganda, in order to extract policy implications.
