CBK rate cut piles pressure on banks to ease cost of loans
The Central Bank of Kenya in Nairobi. The bank lowered its base lending rate to 9.5 per cent piling pressure on commercial banks to follow suit. Photo/File
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CBK’s Monetary Policy Committee (MPC) Thursday observed that the macro-economic environment had improved significantly, citing single-digit inflation and a stable shilling as the reasons for cutting the policy rate to 9.5 per cent.
The committee said the exchange rate has also remained stable since its last meeting in November, to range between 85.38 and 86.61 units to the dollar.
The regulator’s benchmark interest rate cut by 1.5 percentage points Thursday is set to pile pressure on commercial banks to reduce the cost of loans.
At its meeting Thursday, the Central Bank of Kenya (CBK)’s Monetary Policy Committee (MPC) observed that the macro-economic environment had improved significantly, citing single-digit inflation and a stable shilling as the reasons for cutting the policy rate to 9.5 per cent.
The Central Bank Rate (CBR) guides commercial banks to alter their lending rates based on prevailing macro-economic conditions.
“To increase the uptake of private sector credit and re-align interest rates in the economy, the committee decided to lower the Central Bank Rate,” said Prof Njuguna Ndung’u, the MPC chairman said in a statement released Thursday.
Commercial banks typically respond faster to an increase in the CBR than a cut. Nearly all commercial banks raised their base lending rates to above 25 per cent in December 2011 when the CBR hit an all-time high of 18 per cent as the MPC sought to rein-in runaway inflation and stabilise the shilling.
The lenders have, however, been slow to cut the cost of loans in tandem with the cut in the benchmark rate, with the average cost of lending standing at 18.7 per cent, nearly double the regulator’s indicative rate.
The inflation rate declined to a new low of 3.2 per cent in December after falling from a high of 19.7 per cent in November 2011, remaining within the five per cent medium-term inflation target by the government.
The inflation rate is expected to remain in the single digits in the short term on the back of declining oil international prices and improved weather conditions in the country.
The committee said the exchange rate has also remained stable since its last meeting in November, to range between 85.38 and 86.61 units to the dollar.
CBK’s forex reserves have increased to $5.3 billion (Sh450 billion) in January from $5.2 billion in November, giving significant support to the shilling.
Ms Razia Khan, the head of African research at Standard Chartered Bank, said the CBR cut would stimulate new lending, with official data showing a slowdown in private sector borrowing since the advent of high rates.
“Although the outlook for Kenya’s economy remains relatively upbeat —election related uncertainty aside — the need to provide further stimulus was clearly felt,” she said.
Private sector borrowing rose 6.6 per cent in the year to October 2012 to Sh1.2 trillion, a slower rate compared to the year before when it expanded 35.2 per cent to stand at Sh1.1 trillion.
Recent reductions in bank lending rates have renewed the appetite for new loans among individuals and businesses, with the number of credit applications rising 32.5 percent to 97,756 in November from 73,770 in October.
Increased borrowing for investments should boost the economy, which reversed its stagnation with a 4.7 per cent growth in the third quarter of last year compared to four per cent in the same quarter of 2011.
The MPC did not make a reference to the possible impact of the March 4 General Election on the economy, but singled out the eurozone economic crisis and Kenya’s large trade deficit as major threats.
“The market may react to the 1.5 percentage point cut with some knee-jerk shilling weakness but we expect the impact to be limited overall,” said Ms Khan.
