Spending on infrastructure set to cause interest rates fall
Road construction. The government is spending billions of shillings on infrastructure projects. PHOTO | FILE
Government spending on mega projects is likely to increase liquidity in the market and pressure interest rates to fall, credit reference bureau Metropol Corporation says in a forecast.
The liquidity from the government spending is expected to be in hundreds of billions of shilling for projects like the standard gauge railway and the Lamu Port South Sudan Ethiopia Transport corridor.
The Dongo Kundu road construction in Mombasa, expected to cost nearly Sh30 billion, is also a key infrastructural project under way.
The analysis came a day after the Monetary Policy Committee (MPC) of the Central Bank reduced the key base rate, Kenya Banks Reference Rate (KBRR), for the banking industry to 8.54 per cent from 9.13 per cent of the past six months.
Liquidity is also expected to increase with the start of construction of several road projects starting with 2,000 kilometres under the new annuity financing framework, where banks lend cash to contractors who are later paid by the government.
For the SGR, the Chinese have recently released Sh88 billion while the government has spent more than Sh10 billion in compensating farmers and other landowners on the railway leaf.
“Increased government expenditure and disbursement on the SGR implementation will lead to increased liquidity in the market, which should lead to further easing of interest rates over the 2015/16 period,” said Metropol.
Analysts at the Standard Chartered Bank also see interest rates falling after the MPC lowered KBRR.
“With the resetting of the KBRR to reflect lower T-bill yields, Kenyan borrowers will still benefit from a lower interest rate environment…This should continue to support Kenya’s economic acceleration,” said Razia Khan, the head of research on Africa at StanChart Plc.
She said a factor informing decline is the focus on external sources of funds such as the Eurobond.
“Increased external borrowing has capped the level of domestic borrowing that is required, helping to lessen the pressure on short-term yields,” Ms Khan said.
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