The Central Bank of Kenya (CBK) has cut the benchmark lending rate for the third time this year to the lowest level in 12 months but warned that banks are not passing the full benefits to consumers.
The regulator’s monetary policy committee (MPC) on Thursday cut the central bank rate (CBR) to 11.25 percent from 12 percent that has been in place since August 8 this year in bid to revive the pace of private sector credit growth from near zero.
The latest move means that CBR has dropped by 1.75 percentage points since the 12-year high of 13 percent which lasted between February 6 and August 5 of this year.
However, the regulator is concerned that despite the fall in CBR in an environment of cooling inflation, relatively stable exchange rate and falling rates on Treasury bills, lenders are dragging their feet in passing the benefit to borrowers.
“The committee observed that short-term rates on government securities had declined sharply in line with the CBR, but that banks had not responded by lowering their rates proportionately,” said Kamau Thugge, CBK governor who also chairs the MPC.
“The MPC, therefore, urges the banks to take necessary steps to lower their lending rates, in order to stimulate credit to the private sector, and thereby stimulate more economic activity.”
CBK’s statement comes weeks after the regulator held a meeting with banks over the same issue, arguing that lenders were holding onto high rates, hurting chances of stimulating the pace of credit to the private sector.
The regulator said lending to the private sector remained broadly unchanged in October, partly attributed to reduced credit demand due to high lending interest rates.
Growth in local currency denominated loans was at four percent while foreign currency denominated loans contracted by 11.8 percent.
Many banks have argued that interest on deposits has risen, taking up the cost of funds and making it difficult to cut lending rates.
However, rates on government paper, especially those of up to one year, have been coming down —a move that is supposed to translate into reduced cost of funds.
The return from 91-day, 182-day and 364-day Treasury bills averaged 10.45 percent, 10.54 percent and 11.96 percent respectively in this week's auction. The same papers fetched 15.98 percent, 15.97 percent and 16.1 percent respectively in the first auction of the year in January.
The three cuts this year are however not enough to make up for last year’s increase when CBK raised the rates by 3.75 percentage points.
This year, CBK first cut the rate by 0.25 percentage points in August, taking it from 13 percent, followed by a 0.75 percentage point cut in October.
CBK data showed that private sector credit grew by just 0.4 percent in September —the slowest pace in over five years— while the non-performing loan ratio remained at 16.5 percent in October as was in September, the highest in nearly two decades.
Kenya Bankers Association (KBA), the lobby for commercial banks in Kenya, had asked CBK to cut the rate by a larger margin to provide a “stronger signal” to the market for lending rates to come down and reverse the decline in private sector credit growth.
