CBK rate reduction pressures banks to lower cost of loans

What you need to know:

The Central Bank of Kenya’s Monetary Policy Committee (MPC) has lowered the Kenya Banks Reference Rate (KBRR) to 8.54 per cent.
The new KBRR is effective from Wednesday until its next review in July, but can be changed if market conditions vary significantly.
The instrument was introduced last July in order to increase transparency in the pricing of loans.
The average lending rate by commercial banks currently stands at 15.94 per cent, having fallen by one percentage point since last July when it stood at 16.91 per cent.

Commercial banks are set to come under renewed pressure to reduce the cost of loans following Wednesday’s decision by the regulator to cut the key industry reference rate by 0.6 percentage points.

The Central Bank of Kenya’s Monetary Policy Committee (MPC) on Wednesday lowered the Kenya Banks Reference Rate (KBRR) to 8.54 per cent, sending a signal that the cost of loans should drop.

The average lending rate by commercial banks currently stands at 15.94 per cent, having fallen by one percentage point since last July when it stood at 16.91 per cent. KBRR was first set last July at 9.13 per cent.

“With the resetting of the KBRR to reflect lower T-bill yields, Kenyan borrowers will benefit from a lower interest rate environment. This should continue to support Kenya’s economic acceleration,” said Razia Khan, the head of research for Africa region at Standard Chartered Bank.

The CBK governor Njuguna Ndung’u said that loans amounting to Sh732 billion had been moved into the KBRR framework by end of last December.

“Updated data from all commercial and microfinance banks shows that new and existing loans amounting to Sh732.2 billion had been converted to the KBRR framework by December 28, 2014 compared with Sh397.24 billion as at October 19, 2014,” said Prof Ndung’u in a statement.

However, the banking sector regulator left the Central Bank Rate (CBR) at the same level of 8.5 per cent, where it has been since April 2013.

READ: Eyes on CBK as new bank rate fails to lower cost of loans

“Given that the CBR has been retained at 8.50 per cent by the MPC and, considering the weighted two-month moving average of the 91-day Treasury bill rate, the CBK has revised the KBRR consistent with its commitment in July 2014 from 9.13 per cent to 8.54 per cent,” said Prof Ndung’u.

The new KBRR is effective from Wednesday until its next review in July, but can be changed if market conditions vary significantly. The instrument was introduced in order to increase transparency in the pricing of loans.

“The committee concluded that the monetary policy measures coupled with the lower international oil prices continue to deliver the desired decline in domestic prices and, hence, lower inflation,” said Prof Ndung’u.

The CBK boss added that despite inflation having declined, it was still above the government target of five per cent in this financial year. The CBK is supposed to keep inflation at between 2.5 and 7.5 per cent with the target being five per cent.

The MPC said the shilling would continue to be cushioned by the high level of foreign exchange reserves, which stand at 5.79 months of import cover.

The reserves increased following the debut sovereign bond last June and its re-opening last December, thereby helping the CBK to be ready for interventions in the market.