The bank-to-bank lending cost has dropped by 1.3 percentage points to 6.99 per cent from 8.29 per cent in the past week as increased spending by the government filtered more liquidity into the money market.
The Central Bank of Kenya (CBK) said in its latest weekly bulletin that volumes fell to Sh9.08 billion from Sh11.43 billion, with the number of deals coming down to 22 from 29 the previous week.
"The interbank market liquidity conditions improved in the week ending August 15, supported by government payments," said the CBK in the bulletin.
"The decline in volumes and the number of deals was partly due to the fact that the banks had attained the average monthly cash reserve requirements threshold towards the end of the cycle on August 14."
Tuesday recorded the lowest volume (Sh2.46 billion) with some banks borrowing from each other at as low as 3.5 per cent. However, skewed distribution of liquidity continued to be a factor in the market, forcing small lenders to access the overnight lending window at as high as 9.5 per cent.
They also got support from the reverse repo window of the CBK.
Last week's fall in the interbank rate reverses the previous trend of sustained increase in the cost of overnight lending due to tight liquidity conditions prevailing in the interbank money market.
This saw the rate hit a high of 8.73 per cent at some point in the second week of August.
The CBK had partly attributed the rise in interbank rate since July to the seasonal low government spending as the fiscal year 2018/2019 kicked in.