The Limits On Borrowing Rates May Result in a “Perverse Reaction” -CBK

Market activity slightly fell on Wednesday when compared to its performance previously. The NSE 20 Share index declined further by 22.09 points to 3170.22 points from 3487.88 points before while the NASI was up marginally by 0.51 points to close the day at 132.85 points.

The NSE 25 Share index added 6.48 points to end the day at 3494.36 points from 3487.88 points earlier. Market capitalization moved to 1912.985 billion shillings from 1905.733 billion shillings yesterday whilst equity turnover dropped to 0.35 billion shillings from 0.48 billion shillings afore, due to a slide in the volume of shares traded.

Kenya’s decision to introduce caps on commercial-lending rates is complicating monetary policy, Central Bank of Kenya Governor Patrick Njoroge said.

“With the rate caps, it’s not clear which way to go,” Njoroge told reporters in the capital, Nairobi, on Wednesday, a day after the central bank cut its benchmark rate by 50 basis points to 10 percent.

The limits on borrowing rates may result in a “perverse reaction” among banks and lead to riskier borrowers being cut off from lending, he said. Kenyan President Uhuru Kenyatta on Aug. 24 signed a law capping banks’ lending rates at 400 basis points above the central bank rate to try stimulate lending in East Africa’s biggest economy.

Growth in private-sector credit extension has slowed every month over the past year, to a rate of 7.2 percent in July, according to central bank data. Njoroge, who initially opposed legislating interest rates despite saying earlier borrowing costs “were remarkably high”, refused to speculate on the effects of the law on borrowers.

CURRENCIES:

The Kenyan shilling was stable on Wednesday as it traded at a mean of KES 101.26 after the central bank cut its benchmark interest rate by 50 basis points to 10.0 percent yesterday. The local currency gained against the Sterling but slightly lost against the Euro as the market awaits Chairlady Janet Yellen from the Federal Reserve to address the public in regards to the interest rate for the next 30 days in the United states.

The general consensus on the market is that there is a 15 percent chance of a hike and expectations of a lot of volatility for GBP-USD rates during this period.