CBK cuts the cost of loans to spur economic growth

The Central Bank has cut its indicative interest rate for the first time this year, sending a signal to commercial banks to lower the cost of loans as focus shifts to spurring economic growth.

The Monetary Policy Committee (MPC) said after its bi-monthly meeting on Tuesday that it had cut the Central Bank Rate (CBR) by one percentage point to 8.5 per cent. The CBR is the cost at which the regulator lends to commercial banks through the emergency borrowing window.

In making the decision the regulator is banking on the recent peaceful outcome of the election and transition of power for enhanced economic activity, which needs to be supported by easy access to finance.

“The committee concluded that the monetary policy measures continue to deliver the desired results, providing policy space to encourage the private sector to fulfil its growth augmentation role,” said the MPC.

The reduction was in line with market expectations following a stable macro-economic environment that allowed for easing of the monetary policy.

“The CBK is resuming its easing cycle following the elections. Despite risks emanating from the euro area and Kenya’s still-substantial current account deficit, the broad outlook is still for relative stability – a view with which we agree,” said Razia Khan Head of research on Africa at Standard Chartered PLC.

A survey conducted by CBK to guide the policy makers showed increased optimism for a strong growth recovery in 2013 mainly on account of the prevailing macroeconomic stability marked by stable inflation rates and a strong shilling.

Analyst however noted that the shilling, which lost ground against the dollar Tuesday to close at 83.90 units from Monday’s rate of 83.71 may come under some short lived pressure from sections of the market which had anticipated a smaller cut to the CBR.

“Beyond the knee-jerk market reaction, our expectation is that the Kenyan shilling will continue to rally, as Kenyan asset markets benefit from increased offshore inflows,” said Ms Khan.

The Nairobi Securities Exchange 20 share index rose from 4,518.6 in February 2013 to 4,765.2 in April 2013 points driven by increased participation by foreign investors.

CBK noted that the rates charged on commercial loan were dropping at a slow rate and the credit growth for the first quarter reached the traditional sectors of the economy which are agriculture and manufacturing.

(Read: Cost of loans to remain high, say banks)

Data from the CBK website shows that the average lending rate for March when the CBR was 9.5 per cent was 17.8 per cent compared to 20.3 per cent in June last year when the indicative rate was 18 per cent.

Commercial banks have been under pressure to lower their lending rates in line with the CBR reduction from highs of 18 per cent mid last year.

The lenders have attributed their slow transmission of the cut to costly fixed deposits which were locked in by savvy investors during the high interest rate environment.

“The policy rate is a signal to the market; a lot depends on whether the market responds and in this case the market is those who provide deposits to the banks. If their cost goes down then the banks transmit the same to the borrowers” said Mr Habil Olaka, the chief executive of Kenya Bankers Association.

Economist also noted the increased borrowing from the domestic market at higher rates by the government could however crowd out the private sector from accessing credit from the banks which have to consider the opportunity lost in their pricing.

In the last auction 91-day treasury bills returned an interest rate of 10.10 per cent - the highest on record.

The President and his deputy were also urged to hasten the setting up of the cabinet in order to start the laying down of policies which will advise investors on where to put their money.

“We need a cabinet to reduce uncertainties and clear policies on the direction the government will take. This will unlock the money individuals and corporations are keeping in wait and see, which will lead to more economic activities and more tax revenues,” said Dr X. N Iraki.

[email protected]