Commercial banks expect a larger cut in the benchmark lending rate when the Central Bank of Kenya (CBK) holds its policy meeting early next month amid a quest for lower borrowing costs.
CBK’s previous 0.25 percent cut of the Central Bank Rate (CBR) to 12.75 percent from 13 percent in August has only resulted in negligible change in borrowing costs with only Equity Bank Kenya announcing a marginal trim to its base lending rate.
Banks see a scope for a cut of an additional 0.5 percent or more to the benchmark rate by the CBK on October 8 supported in part by sustained low inflation, exchange rate stability and interest rate declines in advanced economies including the United States.
“Any movement that is below 50 basis points (0.5 percent) may just be a signal to the market that we are at a stage where the market should not expect rates to move higher.
"In the next monetary policy committee meeting, we are expecting at least a 50-basis points (0.5 percent) movement and that would be clear to the market and would be transmitted to borrowers/consumers,” said Kenya Bankers Association acting chief executive Raimond Molenje.
Commercial bank lending rates have remained elevated for the past year after the CBK raised its benchmark lending rate to counter inflation and volatility in the Shilling.
The recent stability in both the exchange rate and prices of common goods and services has opened the window for domestic interest rates to climb down from multi-year highs to stimulate economic growth.
The stay of elevated interest rates has resulted in a near two-decade high ratio of non-performing loans (NPLs) for the banking industry while the demand for credit has collapsed.
The ratio of NPLs closed June at 16.3 percent while private sector credit growth was at four percent mirroring the reduced appetite for loans amid high interest rates.
KBA argues the path to lower borrowing costs will not only be determined by a lower benchmark rate, noting that the high appetite for credit by the government from the domestic market is problematic as seen through high interest rates on Treasury bills and bonds.
The banking sector lobby says it has held discussions with the National Treasury where it has emphasized the government's borrowing appetite as a hurdle to low interest rates for consumers.
“The discussions we had point to the government going for more external financing to clear the pending bills which would generate economic activity, creating a shift in NPLs.
"At the same time, the external funding would reduce the government’s appetite for domestic borrowing which will influence Treasury bills and bond rates. When that happens, we will be able to address high interest rates on loans,” Mr Molenje added.
The government has currently accelerated its target for domestic borrowing in the current fiscal year to Sh413.1 billion from Sh263.2 billion previously.
The target for domestic borrowing in the 2025/26 financial year is equally higher at Sh522.7 billion.
Poor revenue collection amid the underperformance of major tax heads and the withdrawal of the Finance Bill, 2024 leaves the scope for even higher government borrowing presenting further headwinds to cheaper borrowing costs.
