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