Central Bank Expected to Retain Policy Rate at 10pc

The Central Bank of Kenya (CBK) is expected to retain its benchmark interest rate at 10 per cent at a policy meeting scheduled for Monday.

Most economic analysts are of the view that the regulator needs to ‘hold’.

“We believe that the MPC should adopt a wait and see approach, given the macro-economic environment is relatively stable,” said Cytonn Investment Analysts in their Cytonn Note on the Monetary Policy Committee (MPC).

According to Cytonn, key concerns still remain declining economic growth that came in at 4.4 percent in Q3’2017 and averaged 4.7 percent for the first 3 quarters of 2017, though expected to improve to 5.4 percent in 2018, but remain lower than the 5.8 percent recorded in 2016, and the slowed private sector credit growth, which improved slightly to 2.0 percent as at October from 1.7 percent in September, but remained well below the government set annual target of 18.3 percent, which is expected to hit economic growth.

Read: CBK Touts Economy as Bullish with ‘Extraordinary Resilience’ 

Jeremy Awori, Managing Director Barclays Bank of Kenya says the banking sector faces a major challenge going forward on the bank’s capital position with the introduction of the IFRS9 which took effect January 2018.

“However, with the introduction of the interest capping rate in the Kenyan market forces same price on the customers irrespective of the risk. which means we cannot segment the market and offer better pricing for less risky customers and could potentially create a further contracting of the private sector lending,” he said during the launch of the Kenya macroeconomic report.

“It is, therefore, important for the government and industry players come together and review the impact of the Banking amendment Act light of the IFRS 9 rules and make the necessary adjustments to the law so that the much-needed capital flows to deserving businesses to stimulate the economy,” he added.

Together with other market analysts continue to reiterate the need for the interest rate cap to be repealed. “Failure to do so will see banks continuing to react to the law and extending as much credit as possible only to the government and other well-established entities,” they note.

“This can be witnessed through increased allocation by listed banks towards government securities, with allocation growing by 15.2 percent to Kshs 776.3 bn from Kshs 684.5 bn in Q3’2016 depriving the private sector of credit in the process,” Cytonn Investments in their Kenya Listed Banks Q3’2017 Report.

“The IFRS 9 commencement in January 2018 is expected to drive commercial banks to tighten credit standards even further with the likely impact of aggravating the current fragile dynamics in private sector credit growth,” notes Stephanie Kimani, Research Economist at Commercial Bank of Africa Limited (CBA).

“With a common problem on the table amid regulatory changes that threaten to worsen the problem, it may now be a matter of when, and not if, the review of the interest rate controls framework will take place,” she adds.

The rate of inflation has been on a downward trend in the last few months to 4.5 percent in December from 5.7 percent since the last meeting and the currency having appreciated by 0.5 percent over the same period of time depreciating by 0.7 percent in 2017, primarily driven by increased diaspora remittances and Central Bank support.

Genghis Capital analysts also state that, “However, the current condition is anything but ordinary as the interest rate legislation has essentially pegged lending rate (and deposit rate) to the CBR; effectively eroding the latter as a monetary policy tool. The present conundrum has left the MPC in a passive state of ‘monitoring the impact of the interest rate caps on the effective transmission of monetary policy’ if the language of recent MPC meetings is anything to go by.”

Read: Cap on Bank Rates has Complicated the Conduct of the MPC – CBK Governor 

On Friday, the Kenyan shilling was stable against the dollar closing at 102.90/103.10 per dollar same to Thursday.
However, liquidity is expected to remain high given heavy maturities of government securities.