Why Central Bank of Kenya won’t slash its key lending rate just yet

Central Bank of Kenya Governor Kamau Thugge. 

Photo credit: File | Dennis Onsongo | Nation Media Group

The Central Bank of Kenya (CBK) has said it will not cut its indicative lending rate just yet, despite dampened demand for credit and heightened defaults, citing stubborn inflation that has kept international interest rates high.

While the apex bank sees scope for cutting interest rates, it said the sustained high interest rates in advanced economies have tied its hands, warning that any premature trims on its Central Bank Rate (CBR) risked returning the local market to inflationary and exchange rate pressures.

“From what we see, inflation rates in advanced economies have remained quite sticky and thereby, we have had a delay in the reduction of policy rates. The expectation is that international interest rates will remain higher for a much longer time and we have to be very cautious about taking measures that would cause the kind of problems we had last year,” CBK Governor Kamau Thugge told a post-policy meeting news conference on Thursday.

By raising its benchmark interest rate to 13 percent, the CBK has encouraged foreigners to invest in the country as the inflation-adjusted return matches that of advanced economies.

In cutting interest rates before the advanced economies, the CBK fears a return to foreign outflows, which would result in the domino effect including the depreciation of the Kenya shilling and a run-up in inflation as the cost of imports rises.

The apex bank has, however, acknowledged the pain of high interest rates even as it finds itself in a catch-22 situation.

Borrowing costs have for instance soared to multi-year highs with the riskiest customers paying nearly 27 percent to obtain loans from commercial banks.

The sharper lending costs have resulted in debt service difficulties for some borrowers, sending the ratio of non-performing loans to an 18-year high of 16.1 percent as of April 2024.

The soaring bad loans have been observed in the sectors of agriculture, real estate, tourism, restaurants and hotels, trade, building, and construction.

At the same time, private sector credit has fallen from a double-digit rate of growth, easing to 7.9 percent and 6.6 percent in March and April respectively.

This is as banks tighten their credit standards including demanding higher value collateral as part of measures to contain the rising non-performing loans.

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