CBK Maintains Lending Rate at 10 pc, Suspends KBRR

The Central Bank of Kenya (CBK) maintained the base lending rate at 10 per cent in its Monetary Policy Committee (MPC) meeting on Monday projecting that inflation will remain within the Government target range in the short term.

CBK Governor Patrick Njoroge said in a statement that, “However, the Committee noted increased uncertainties with regard to the prevailing drought conditions and risks in the global markets. The MPC therefore, decided to retain the Central Bank Rate (CBR) at 10.0 percent in order to anchor inflation expectations.”

Further, “The MPC considered the Kenya Banks’ Reference Rate (KBRR) which was introduced to provide a transparent credit pricing framework. In view of the adoption of the new law capping interest rates the CBK decided to suspend the KBRR framework.”

KBRR was introduced in July 2014 following discussions between commercial and microfinance banks, mortgage finance institutions, Kenya Bankers Association (KBA), Central Bank of Kenya (CBK), and The National Treasury. It is part of their recommendations to explore ways of enhancing the supply of private sector credit and mortgage finance in Kenya.

The primary purpose of the KBRR is to ensure that banks are transparent with respect to the cost and pricing of their products.

According to analysts, Cytonn Investments’ MPC note, they had not expected any change from the regulator, “Since inflation, though expected to increase, is expected to remain within the government target range of 2.5% – 7.5%, the currency despite being under pressure can so far be supported by the forex reserve and the stand-by facility from the IMF, and economic growth might be delicate this year hence the MPC is expected to maintain an expansionary stance.”

Further, the International Monetary Fund (IMF) after completing the first review under the Stand-By Agreement/Standby Credit Facility (SBA/SCF) Agreement last week, had warned that a sustained capping of commercial banks’ lending rates at 4 percentage points above the Central Bank of Kenya benchmark rate ‘if maintained, they could potentially pose a risk to financial stability.

According to IMF, “It is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector.”

“The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth. They also complicate monetary policy and adversely affect banking sector profitability, especially for small banks,” warns IMF.

However, CBK noted says,” The Committee observed that available data was inconclusive for assessing the impact of the recent capping of interest rates. With regard to the impact on the banking sector, banks are reviewing their business models aimed at enhancing the resilience of their operations in the new environment.”