Central Bank Rate Cut to 10 Percent to Improve Credit Lending

The Central Bank of Kenya (CBK) has cut its benchmark rate by 50 basis points to 10 percent citing the slow private lending and responding to the Banking Act Amendment Bill 2015 which became effective on 14 September.

The bill capped lending rates at 4.0 percent above the CBR and a floor on the deposit rates at 70 percent of the CBR.

This is the second cut in four months to boost the private sector growth.

“The MPC noted the continued decline in growth of private sector credit, which has persisted since last meeting, posing a risk to the economic growth,” Dr. Patrick Njoroge, Chair of the Monetary Policy Committee (MPC) said in a statement.

The CBR has been at 10.5 percent since July 25 and the current move was to lower inflationary pressure.

“The committee observed that the demand pressures on inflation are moderate and inflation is expected to decline in the short term, but the committee remains concerned about the persistent slowdown in private sector growth,” said Njoroge.

On the Banking Amendment Act 2016, which is now being implemented, the committee said the, “The CBK is closely monitoring the impact of the new law on monetary policy and on the overall economy. The CBK will continue to put in place measures to suitably reduce the cost of credit and improve liquidity management.”

The committee on average the inflation has decreased to 6.3 percent in August from 6.4 percent in July remaining within Government range. However, ‘there were no significant demand pressures in the economy’ as the non-food-non-fuel (NFNF) inflation being stable.

With the latest cut, banks in line with the new interest rate they will have to reduce the maximum interest rate they charge on any credit to 14 percent from the current 14.5 percent.

Mohammed Wehliye, a banker on his Twitter feed in response he says, “We are trapped. Almost stagnant credit growth? Lower CBR because that lowers lending rates, banks won’t lend as a result will lead to stagnant growth.”

MPC noted a stable a stable foreign exchange market reflecting the narrowing of the current account deficit due to improved export earnings from tea and horticulture, a reduction in the imports of petroleum products due to lower oil prices, resilient diaspora remittances and improved tourism performance.

For Wehliye, “We consume more than we produce.” He observes that Kenya’s major Foreign Exchange earners use planes, tourists and diaspora remittances ‘But we put most money in a single project in a SGR and cap rates that will subsidise consumption more than production. Where is the logic? He posits.