Capital Markets

CBK governor says capping of interest rates has hit economy hard

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Central Bank governor Patrick Njoroge. file photo | nmg

The Central Bank of Kenya (CBK) has renewed push for a repeal of the law capping interest rates, which it says is having a negative effect on the economy.

CBK governor Patrick Njoroge speaking at a briefing in Nairobi said the controls that have resulted in a credit crunch as banks ration credit had slowed down the economy.

Private sector credit grew by 2.4 per cent in the 12 months to December 2017, only slightly higher than the 2 per cent in October 2017.

“So far the interest rate caps have been acting as a break to the economy,” Dr Njoroge said. “The economy is being held back by this. This is something that we need to bring to the fore and deal with so as to support rather than inhibit economic dynamism.”

The economy grew 5 per cent in the first half of last year, falling short of a full-year government revised forecast of 5.5 per cent. The 2017 full year forecast has since been trimmed to under 5 per cent.

The Banking (Amendment) Act, 2016, which came into force on September 14 last year, caps loan charges at four percentage points above the Central Bank Rate (CBR) now standing at 10 per cent.

READ: Central bank sets stage for repeal of interest rate caps

The law also requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.

Critics have accused banks of engaging in blackmail and economic sabotage to force through amendments to the law.

However Dr Njoroge said unlocking the credit crunch is a prerequisite for economic growth in 2018.

He is bullish on the economic prospects in 2018 projecting growth of around 6.2 per cent.

He cited expected cuts in the cost of transportation and increased exports as a result of the new Standard Gauge Railway, as well as planned direct flights to the US and expected resurgence in the tourism sector as factors that would boost growth.

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