Uhuru turns heat on CBK over weak shilling, inflation
Members of the civil society protest along Nairobi’s Moi Avenue over the rising food prices in July. TOM MARUKO
The government Thursday admitted that its monetary policy is off the track and must be immediately fixed to shield the country’s fragile economic growth from stalling.
Finance minister Uhuru Kenyatta said there was a need to restore monetary stability and arrest inflation, which he said was way above the target range and was causing shocks in East Africa’s largest economy.
“We need to take some action towards that end to restore some kind of stability on the monetary side of our affairs,” he said as he revealed that the Treasury had opened discussions with the Central Bank to deal with the matter.
Mr Kenyatta spoke in Nairobi while receiving a Sh1.1 billion food aid grant from the Chinese government in a week that saw interbank interest rates rise to 24.25 per cent buoyed by the central bank’s tightening of overnight borrowing rules to support the shilling.
While the high interest rates have helped stem the shilling’s slide, they have also significantly increased the cost of borrowing for the government and bankers warned of a looming rise in lending rates with the ongoing increase in the cost of funds.
On Thursday, the discount window rate that the central bank uses to lend to distressed banks continued its rise to 27 per cent from 6.25 per cent on August 12.
Meanwhile, Treasury’s attempt to slow down the rise in the cost of domestic borrowing to government saw most lenders keep off the market, leading to one of the lowest subscription rates for public debt in recent times.
The government raised just over a third of the Sh10 billion it had sought in sales of five- and 30-year Treasury Bonds on Wednesday, even as yields on both securities rose by significant margins.
Central Bank received bids worth a total Sh8.7 billion for the bonds, and accepted bids worth Sh3.48 billion.
Treasury yields have been rising steadily this year as inflation surged into double digits on the back of high food and fuel prices.
Spared the shocks
Commercial banks have not been spared the shocks but have had to put up with high cost of borrowing from the CBK through the discount window where they are now charged at interbank rate plus three percentage points.
The Central Bank changed the rules governing borrowing through this window on August 15 to close arbitrage opportunities (the making of profits by borrowing from the CBK to lend to other banks) in the market.
Most bankers expect the rising cost of short-term borrowing to start pushing lending rates up as lenders pass additional costs to the consumer.
Depositors have added to the upward pressure on lending rates in their demand for higher interest on their cash in tandem with the ongoing surge in the rate at which government paper (also called risk-free rate) is borrowing from the domestic market.
Scarcity of cash and continuing rise in the cost of borrowing from other banks, the central bank and depositors means that mortgage and other lending rates could start rising as early as next month.
For commercial banks, these three factors together have the effect of raising the cost of funds for both fixed and savings rates.
The cost of mortgages is among those that are likely to be affected by the steep rise of the yield on the 30 year bond.
Bankers said persistence of high cost of funds next month will leave them with no option but to increase lending rates.
Only lenders holding cheaper cash in form of bonds are expected to keep their mortgage rates untouched.
“We are worried with the continuing rise in interest rates on both short and long-term paper,” said Frank Ireri, managing director at Housing Finance. “We are monitoring the market on a daily basis in view of what is happening.”
Mr Ireri said Housing Finance had procured funds through a fixed-income bond and has used the money to offer mortgages at a five year fixed rate of 14.5 per cent.
He however said the mortgage lender also gets funds from other sources – such as deposits – that are being affected by changes in both short - and long - term market rates.
Arun Mathur, the CEO of I&M bank, said that thought most banks have raised interest rates in the past few months, chances of further rate increments are high with the continued rise the short and long-term rates.
“If these rates continue to rise to next month, the cost of funds will rise ultimately pushing up the lending rates,” he said. “The only hope is that maturing of Sh9 billion worth of government paper next week and another Sh8 billion next month is going to cool down the market and stabilise the rates.”
Mr Mathur however said that banks will have to be cautious in their pricing of mortgages with the rise in cost of living that is eroding the middle class’ disposable incomes.
Kimanthi Mutua, former K-Rep bank CEO and now director on the bank’s board, said high interest rates could render many borrowers incapable of servicing loans and raise the volume of bad loans across the entire sector.
Engines of growth
“In fact, you could also slow down lending because the rates may become unaffordable especially for SMEs that are the engines of growth for the economy,” said Mr Mutua.
It has not been possible to know how money the government pumped into financial institutions in the past five days since the Central Bank stopped publishing the information on its website.
High level accumulation of government funds at the CBK rather than spending it often starves the money market of liquidity – leading to increased borrowing in the interbank market and the discount window.
During the latest auction, the yield (or return) on the latest 30-year bond rose by nearly three percentage points to 18.8 per cent – the highest for any bond currently trading at the Nairobi Stock Exchange.
