CBK seen lowering lending rate to cut cost of bank loans
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The Central Bank of Kenya (CBK) is likely to ease monetary policy gradually in the next two quarters in order to lower the cost of credit for bank borrowers, analysts at research firm Stratlink Africa say.
They join analysts at Citi who had forecast the action as early as during the last CBK policy rate review that left the rate untouched.
Stratlink notes that the current base lending rate matches that of September 2012, a time when inflation was in double digits. This means that prevailing conditions allow the regulator room for downward adjustment.
The Central Bank of Kenya (CBK) is likely to ease monetary policy gradually in the next two quarters in order to lower the cost of credit for bank borrowers, analysts at research firm Stratlink Africa say.
They join analysts at Citi who had forecast the action as early as during the last CBK policy rate review that left the rate untouched.
The regulator had tightened its policy in the second half of 2015 in reaction to rising inflation and a weakening currency, raising the base lending rate by 300 basis points to 11.5 per cent and mopping up liquidity from the money markets.
The monetary environment has as a result stabilised this year, with the March inflation falling to 6.45 per cent from 8.01 per cent in December. The shilling is also stable within a range of 101 and 102 units to the dollar through the first quarter of the year, and with foreign currency reserves up to Sh748.2 billion ($7.38 billion) CBK is in a position to defend it against volatility.
Stratlink notes that the current base lending rate matches that of September 2012, a time when inflation was in double digits. This means that prevailing conditions allow the regulator room for downward adjustment.
“CBK is likely to adopt a dovish (easing) stance between quarters two and three in 2016 in a bid to ease the pressure off high commercial bank lending rates. The latest survey by the CBK indicates majority of borrowers experienced a rise in the cost of credit in the last quarter of 2015, a trend that the market regulator will be keen to reverse in the year under way,” said Stratlink.
“The short-term focus of the CBK is likely to be gradual expansionary policy, cautious not to erode gains made in the stabilisation of price levels and the foreign exchange market. In the long-term, the focus is likely to be on providing an environment accommodative enough for accelerated economic growth.”
Such a stance sees a regulator pursue low-interest rates as a means of encouraging growth within an economy banking on an increase in consumer borrowing to spur spending.
In its March 21 Monetary Policy Committee meeting, the CBK held off from changing the base lending rate, citing a need to anchor inflation expectations and enhance the credibility of its policy stance.
The MPC, however, raised concern of an increase in non-performing loans in the banking sector (credit risk), while banks’ average lending rates remained high at 17.9 per cent in February.
In terms of cost of money for the lenders, the rate paid on fixed deposits sits at about 7.8 per cent while the 91-day Treasury bill rate is currently at 8.6 per cent and the interbank rate at 4.3 per cent.
In a bid to tame the high lending rates, the CBK is preparing to come up with a new loan pricing tool to replace the Kenya Banks Reference Rate which is currently pegged at 9.87 per cent.
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