Illiteracy in Basic Economics - Once Again!

When I saw the Daily Nation tell us today that the IMF calls for  interbank rate control in Kenya, I wouldn't help but recall that in the recent past I have asked (actually twice - here and here) whether the Nation Media Group has an economics editor. I guess I would have to go easy on the question and surmise that clearly they do not need one.

Why do I think so? Because the author of the piece hinges his sweeping observations on a recent IMF Working Paper. I happen to have read the said paper three days before the Daily Nation story was published. I would like to argue that:

• One, my reading was very careful because the paper is very technical but well written for a trained eye to enjoy [I didn't expect the Daily Nation reporter to understand what the hell the exponential generalized autoregressive conditional heteroskedasticity  (E-GARCH) specification is all about!].
• Two, the paper's conclusion - written in plain English nowhere suggests for a control of the interbank rate.
• Three, the habit of picking statements from a technical paper with the objective of fitting a particular narrative is very addictive in the media, especially when there is a desperate endeavour to appear knowledgeable on a subject where the reality is the exact opposite. 

I have a strong feeling that either the author doesn't - or chooses not to - understand  how the interbank market operates. So let me make no assumption here and observe as follows:

• First, the interbank market is an overnight market whose price (the interbank rate) is influenced by the overall liquidity in the market. 
• Second, the other money market rates such as treasury bill rates are a reflection of liquidity situation in the market and therefore have an implication of what the interbank rate could be.
• Three, (and this is for those technically inclined) the E-GARCH methodology allows for the determination of the direction of influence between the interbank rate and the treasury bill rate; and such influence can be dual (meaning the two influencing each other). The IMF paper indicates that such influence is strong from the interbank rates.
• Four, the interest of ensuring a smooth interbank rate that is coordinated by the policy rate (the Central Bank Rate[CBR] in this case) is such that the central bank could use the interbank market as an operational target for monetary policy - the CBR is the signal rate and the interbank is the operational rate
• Five, there are merits in the central banks creating a band around the CRB around which the interbank rate could fluctuate (the paper calls it a corridor). The narrower the corridor the better it is to manage volatility in the interbank market given that the CBK does not fluctuate frequently.

Does the proposal for the creation of a corridor amount to a call for controlling the interbank rate? Definitely not. The central bank can only seek to influence, but not control, the interbank rate. That is why, to let the IMF paper speak for itself, 

"by announcing a rate that it wishes to prevail in the overnight interbank market and ensuring its implementation through day-to-day liquidity operations, the central bank aims to influence and stabilize longer-term rates, important for overall level of prices and real economic activity. Likewise, the central bank’s ability to reduce volatility of overnight interbank rates should matter for monetary policy because interbank market volatility may

affect funding costs for longer-term financing".       

So where is the Daily Nation coming from with its screaming assertion about the call for interbank rate control? I do not know. I suspect it is a function of the implicit sympathy to have money market rates controlled - aligned to the silly proposal by the a section of the legislature - that the media house is shy of directly asserting.

But it all amounts to illiteracy in basic monetary economics.