Central Bank moves to stimulate growth with cheaper credit
What you need to know:
The policy signal was transmitted through the Monetary Policy Committee’s (MPC) decision to cut the Central Bank Rate by 3.5 percentage points to 13 per cent.
The decision is in line with recent developments in the macro-economic environment that have seen inflation ease to 6.09 per cent, the lowest since January 2011.
The shilling has also stabilised at around 84 units to the dollar, oscillating only within a narrow band of about 50 cents for several months.
Access to credit has become harder since last December when the MPC raised the policy rate to a high of 18 per cent in response to the steep rise in inflation pressure and exchange rate volatility in the last quarter of 2011.
The Central Bank of Kenya Wednesday tipped the scales in favour of cheaper credit, signalling a fresh resolve to stimulate the economy and curb the growth of loan defaults.
The policy signal was transmitted through the Monetary Policy Committee’s (MPC) decision to cut the Central Bank Rate by 3.5 percentage points to 13 per cent.
The decision is in line with recent developments in the macro-economic environment that have seen inflation ease to 6.09 per cent, the lowest since January 2011.
The shilling has also stabilised at around 84 units to the dollar, oscillating only within a narrow band of about 50 cents for several months.
Access to credit has become harder since last December when the MPC raised the policy rate to a high of 18 per cent in response to the steep rise in inflation pressure and exchange rate volatility in the last quarter of 2011.
The resulting high cost of credit has constrained borrowing, leaving most banks with flat loan books, slowing down consumption and the pace of economic growth.
Lending by Kenyan banks grew by 16.5 per cent in June missing the 18.2 per cent target – indicating that the price of money had risen too high for potential borrowers.
Wednesday, the CBK said its decision had been informed by expectations of low inflation and exchange rate stability even as it remained alive to the risks posed by the global economic slowdown, high oil and food prices.
“The MPC’s market perceptions survey conducted in August 2012 showed that the private sector expects inflation to continue declining, the exchange rate to remain stable and the economy to be resilient in 2012,” CBK governor Njuguna Ndung’u said in a statement.
“The committee also recognised that there remain(ed) risks to those elements relevant to monetary policy in maintaining macroeconomic stability,” he said.
The latest cut in the CBR is also in line with the expectations of many analysts who had predicted a significant cut in the policy rate.
StanChart head of Africa research Razia Khan had indicated that she expected a three percentage points cut to 13.5 per cent saying the MPC was likely to take a measured pace while African Alliance’s Alexander Muiruri had forecast a 4.5 percentage points cut to 12 per cent.
Wednesday, Ms Khan said the decision was a clear show of the authorities’ concern over the pace of economic growth – and hence the need to ease access to credit, taking advantage of the comfort from the recent build-up in forex reserves.
“The fairly aggressive all-at-once cut reflects the relative comfort of the Kenyan authorities with the buffers against external shocks that are now in place,” Ms Khan said.
“In particular, forex reserves now account for over $5 billion, representing 4.2 months of import cover.”
She said concerns remain about the underlying weakness in the economy “although in our view quarter two GDP data should paint a picture of some improvement.”
The Central Bank said that the global economic weakness remains a key factor in the policy rate easing decision, especially because the global economic slowdown has had a dampening effect on domestic growth and the balance of payments.
“Going forward, the CBK will continue to monitor these risks and take appropriate actions,” said Prof Ndung’u.
Kenya Bankers Association chief executive Habil Olaka said the market expected the easing of monetary policy and was only waiting to know the margin.
Mr Olaka declined to comment on how soon the policy signal would translate to real drops in the cost of loans in the retail market.
Banks have in the past been following any rise in the policy rate with immediate raising of the lending rate but have only gradually climbed down after a rate cut.
The steep rise in the CBR from 11 to 18 per cent towards the end of last year, for instance, saw commercial banks immediately raise their base lending rates to between 25 and 30 per cent slowing down credit growth.
By June, the severe tightening of monetary policy had helped the Treasury to achieve its borrowing target, leaving the CBK with little justification to keep a tight grip on the flow of money.
Growth has also been slow and the MPC saw the recent improvement in the macro-economic environment as an opportunity to stimulate consumption with affordable credit.
Gross domestic product rose by 3.5 per cent in the first quarter of the year compared a 5.7 per cent in the same period last year.
The MPC began its monetary policy easing journey in July with a 1.5 percentage point cut and commercial banks have since followed suit with similar cuts in base lending rates.
The MPC had also considered that a steep cut in the CBR – say by the margin with which it rose in October and November last year – would have a negative impact in terms of making access to credit much easier to the extent of flooding the country with imports.
That would result in renewed pressure on the exchange rate as people convert borrowed cash into hard currency.
The three and half percentage points cut is therefore being seen as a cautious move that is also alive to the wide import-export gap standing at double-digit levels.
Ms Khan said that “although Kenya’s real interest rate remains substantially high – at around seven per cent – we do not get a clear sense that the next MPC meeting will necessarily deliver an equally aggressive a rate cut.”
Underlying fundamentals
“There was clearly a window to move this time around, and the CBK has seized that opportunity. The future pace of easing will be governed by developments between now and the next MPC meeting,” said Ms Khan.
There are strong expectations that the shilling may come under pressure as a result of the easing.
Speaking in a phone interview before the announcement of the cut, Ms Khan had held that the authorities are still in mortal fear of the underlying fundamentals such as the huge current account deficit.
“As long as the current account deficit remains in double digits as a per cent of GDP, or close to double digits, the MPC will need to exercise some degree of caution.
Kenya’s economy will benefit from further stimulus, but the speed of stimulus provision is likely to be carefully controlled,” she said adding that there is little question that interest rates have to fall further.
“For now, it’s just a question of the preferred pace of that easing.”
