The fed yesterday announced that they are slashing interest rate to zero.

In my humble opinion I think this is disaster waiting to happen.
During the aftermath of 9/11 the fed did the same thing they slashed the interest rate to about 1% to boost consumer lending and at the same time encourage consumerism.

most analyst associate the slashing of the interest rate at that time with the current financial melt down .whats your take on this?

@ scubidu

kes o/n rates are up...think we are north of 3 pct as of today...the time we hit 1.98 there was excess chumz chasin ifdb

Interbank rates help me ZERO as a consumer. What GoK needs to do is push their borrowing rates down then 'force' banks to follow suit.

When I say 'force' not by diktat but other means at its disposal. GoK through its Bills/Bonds is crowding out the private sector.

I think since May 2009 CBK has tried to lower rates through the CBR reduction and by increasing reserves in the system (either through OMO injections or reduction in the reserve ratio). Banks are still not responding...maybe they should lower the liquidity ratio from the current 20% to make banks reduce their liquid assets (raise op. cost). Or maybe Govt should start spending more so that those deposits (Kshs70 bn) they have at Central Bank will enter the commercial banking system...banks will be very liquid then and forced to lower lending rates.

It's a great stimulus...in 2008 they used the omo to alleviate the liquidity issues brought about by the Safcom IPO...used the regular repos and term auction facility for 4 months. In 2009 we're going into 8 months of injections which are highly correlated to public auctions.

Check out these links
http://www.econbrowser.c.../federal_reserve_2.html
http://www.zerohedge.com...intervention-techniques

Ive also been trying to read on basic econ/(banking) and the crr reduction can reduce the level of omo activity...the lowering of the crr like in July 09...enables the CBK to inject less money into the system but get more out of each injection in terms of meeting a desired target of deficit borrowing, as the multiplier effect on that money is higher (Money Multiplier=1/Reserve Requirement).

So if CBK didn't pump in reserves for the ifdb how wud the banks have been able to facilitate K18 bn in new borrowing. Check out the following link http://www.scribd.com/do...king-by-Murray-Rothbard . Read page 170 (page 195 on the pdf) of the doc. This is how i got the stuff above.

Kizee. Are you sure cbk doesn't have a clue about the arbitrage? The cbk is full of smart economists and the last fews T-bill auctions have averaged considerably lower interest rates (including the recent ifdb). Commercial banks liquidity is mopped up during a public auction, then cbk pumps liquidity in the banking system and then Treasury sits on the money because they don't want to tempt inflation by spending it too quickly. I'm just thinking of the precedent being set that banks can lend to govt and simply borrow reserves later. If cbk had not afforded banks this priviledge would these banks chance that liquidity risk amongst themselves?

I had a closer look at 14-15 Dec injections and noticed that the 364 T-bill has caused liquidity problems in that they're few (if any) redemptions since they introduced it in August 2009. There's an interesting correlations on 17 Aug, 12 Oct & 14 Dec when redemptions are either zero or smaller than amounts raised. The next 364 T-bill is expected on 8 Feb 2010 raising 8.5b with zero redemptions expected.

A friend of mine sent me the crr changes over the last 25 years. Check it out below.

(Dec-1986) = 6.0%
(1995) = 20.0%
(Dec-1997) = 15.0%
(Sept-1998) = 13.0%
(Dec-1998) = 12.0%
(Oct-2000) = 10.0%
(Jun-2003) = 6.0%
(Nov-2008) = 5.0%
(Jul-2009) = 4.5%

The money multiplier on a 20% crr is 5 <(5 = 1/0.2)> but our current multiplier is 22.2, so it works well (liquidity-wise) for banks when the crr is lowered, but not vice versa. The crr cannot be adjusted upwards very easily. I think this is because if the crr is adjusted upwards and the cbk tightens its policy, it will mean a more severe contraction in money supply (when the cbk finally starts selling government securities on the open market to mop up liquidity to combat inflation).

How much lower will our crr go? Some countries have no crr (0%). Do we need one? Cbk injected 16 bn between 10-15 Dec which represents 3.6% of Oct-09 M1 (443 bn). M1 comprises currency in circulation (paper notes and coins) and demand deposits (current accounts) which is money the public demands because they use them to buy stuff. The implied assumption in a 4.5% crr is that banks currently only need 4.5% in cash reserves to service currency demands from the public, but if they can borrow as much overnight (with ease) why have a crr? Between February 1972 to May 1978 Kenya's crr was 0%.

Merry xmas

@scubidu...if cbk were indeed aware why does the arbitrage still exist?...what u shud be looking at is the trend of interbank overnite rates vs tbond rates...better still t-bill rates then ask urself if cbk kno wat theyr doin

theres arbitrage between cbk repo rates and the tbill rates ....if u borrow money from cbk for say 91 days the max u will pay is 3.5-i.e u do 15 day repos and keep rolling over the repo..u can place the money for 91 days with GoK at 6.7pct...arbitrage...basically what im sayin is that the steepness of our yield curve allows u to borrow short term and lend long term and make cash...cbk dont lend directly to GoK but cbk do whatever it takes to make sure GoK get the cash as u said they lend to banks to lend to GoK...so GoK end up payin a spread on their own funds..so what U are sayin is that cbk allow u to arbitrage them and GoK..cbk=gok rite?

scubidu..are we being sarcastic?? if you think im not makin sense or are mistaken please say so...anywho ..i dont lyk youtube..wenever i start typin you my pc automaticaly directs to youporn..go figure!..but yes GoK are payin the spread U are rite man... some yield curves are easier to arbitrage than others....arbitrage disappears wen too many arbitrageurs(sp??) seek to exploit it

ur assertion that cbk wud be comfortable being arbitraged(to beg a phrase) is amazin..which economic agent be they public or private wud be? come on man!thats not all the arbitrage that cbk allow fin markets to benefit from..the clowns hav an on and off fx auction wherein they post at 11.00 that they will be buyin X number of USD from the market...all bids to be tenderd by 12.00..is this a very brite way of doin things in ur view?

the arbitrage aside,looking at commercial banks with surplus willing to lend and the public willing to borrow. with the current economic situation the banks will end up with more unserviced loans Q1 2010 as the same Gok is doing crowding out by selling Tbill and bonds in small bands that the common man can purchase. rem these auctions are not redeemable in short time.so the banks money lent tied by the Gok result low liquidity, inflation up , no stimulus and stagnating economy. any more solution