Liquidity may describe the ease with which an asset can be sold or bought or a business ability to meet its payment obligations. In our context liquidity refers to the amount of money commercial banks hold in their reserves to meet the depositor’s requirements of withdrawals on demand.
Excess liquidity
therefore means that commercial
banks
are holding more
cash reserves than they ideally should, above the usual requirement. This
means that commercial banks are have more cash in
holding than the customer would desire.
With higher cash reserves comes higher money supply, banks have more money to lend to one another and to customers. The lending between banks is determined by the interbank rate, which if you have been following the news, has
been
falling over the last few days. We can hypothesize that since the banks have higher cash reserves they can lend it to one another at a
lower rate as it is in plenty.
The CBK on the other hand sees this as an undesirable situation. Lower interbank rates mean that banks can borrow cheaper and lend cheaper increasing the supply of money within the money markets. An increase in money supply is one of the factors that lead to inflation.