The Central Bank of Kenya on Wednesday kept its benchmark interest rate steady, sparing borrowers another increase in the cost of loans even as the decision left the market wondering whether the regulator had abandoned a formula for setting the minimum cost of loans it established two years ago to ensure stability in the money market.
The Monetary Policy Committee (MPC) retained the Kenya Banks’ Reference Rate (KBRR) at 9.87, ignoring the recent increase in Treasury bill rates that is a key ingredient of pricing formula.
The committee also retained the indicative Central Bank rate (CBR) at 11.5 per cent -- the third time in a row.
The CBK reviews KBRR every six months and arrives at it through a calculation of the average Treasury bill rate in the past two months before a review and the Central Bank rate (CBR).
“In order to ensure market stability, the CBK reviewed the Kenya Banks’ Reference Rate (KBRR) and decided to retain it at its current level of 9.87 per cent,” said the chairman of the committee, Dr Patrick Njoroge.
Treasury bill rates shot to above 20 per cent before sliding back to average 10 per cent in the last two months of 2015.
In the two months to June 2015, the T-bill rates stood at an average of eight per cent.
“The market was fearing a raise, but it should be relieved that the fears did not materialise,” said Kenya Bankers Association chief executive Habil Olaka.
Kenya Revenue Authority on Tuesday raised its accepted market rate in calculation of the fringe benefit tax to 14 per cent up from 12 per cent in December and eight per cent in September, underlining the movement towards higher lending rates.
MPC said exchange rate stability and its belief that current inflationary pressures were temporary prevented it from raising the CBR.
Prices of goods as measured by inflation have been on the rise in the last three months with inflation rate at 8.01 per cent, above CBK’s upper target of 7.5 per cent.
MPC has the option of using interest rate hike to rein in inflation, but said it will be using other monetary instruments available to it to maintain price stability.
“The increase was driven largely by food prices. Many of these items are seasonal and fast-growing, and their impact on inflation is expected to dissipate by April,” said the committee.
MPC’s actions were in line with analysts’ expectations. They had argued the market regulator would not wish to rock the boat. Analysts expect interest rates to be lowered during the year in order to spur economic growth.
“This was an MPC that acted early and pre-emptively where they saw a threat to currency stability in hope that it influences inflation further out.
That sort of action has gained the CBK a lot of credibility and the space to be able to cut interest rates when they think market conditions and the inflation outlook justify that,” said Standard Chartered’s chief economist in charge of Africa research, Razia Khan.
Retention of interest rates also spares the government from expensive debts as it moves into a period of aggressive implementation of development projects as the financial year nears a close.
Queries have been raised over the effectiveness of the KBRR in shielding the public from arbitrary interest rate changes by banks.
Last year, banks increased the lending rates even before CBK raised the standard base rate, leaving the regulator pleading for lowering of the rates.
Dr Njoroge has promised to review the KBRR model, which is viewed to rely a lot on the short term rates.
“Updated data from banks show that new and existing loans amounting to Sh1.4 trillion had been converted to the KBRR framework by end of December 2015, compared with Sh1.37 trillion by the end of October,” said Dr Njoroge.
Increase in lending rates is likely to hurt the economy as was witnessed last year when corporate earnings sagged from high financing cost. Higher loan installments also eat into households incomes, reducing their ability to spend.
Commercial banks are allowed to load a premium on the KBRR so as to arrive at their final market rate. The premium factors the cost of deposits for the lender, operational cost and risk factor. The banks have been using the premium as a free pass to move interest rates.
CBK has also absconded on its promise to be releasing data on loan pricing by different banks denying borrowers a platform to compare prices and vote with their feet.