Central Bank governor Njuguna Ndung’u says banks had lent out 187,731 new loans worth Sh43 billion in the two months to August. PHOTO | FILE
Central Bank on Wednesday retained the policy rate at 8.5 per cent amidst rising inflation and the shilling coming under pressure but signalled it will remain active in the open market to mop excess liquidity.
With inflation rising for the fifth straight month to 8.36 per cent, against the acceptable upper limit of 7.5 per cent, it was thought the committee could cut money supply by cuing a higher price of money through the Central Bank Rate (CBR).
“The MPC (Monetary Policy Committee) therefore decided to retain the CBR at 8.50 per cent given that there were no fundamental structural pressures on inflation, but will pursue a tightening bias in the money market through the CBK monetary policy operations in order to continue to anchor inflationary expectations,” read part of its statement.
Analysts said the retention was meant to persuade commercial banks not to increase lending rates to the private sector even after CBK reduces money supply, which will see banks incur higher costs to attract deposits and in the interbank market.
“They had to retain because the politics cannot allow them to raise. Ideally tightening through raising interest rates would have been the way to deal with inflation but they are supporting the fiscal policy,” said corporate finance and advisory manager at ABC Capital Johnson Nderi.
Central Bank governor said banks had lent out 187,731 new loans worth Sh43 billion in the two months to August under the new pricing model — Kenya Banks Reference Rate — indicating huge credit appetite. Rapid credit growth is considered a trigger for inflation as it results in too much cash chasing a few goods.
Governor Njuguna Ndung’u, however argued the credit was going to productive segment of the economy and not consumption.
Following the launch of the standard industry base rate for banks, KBRR, the regulator said lenders were loading an average premium of 3.05 per cent for mortgages and 4.09 per cent for corporate loans with tenure of one to five years.
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