Kenya’s decision to peg its interest rate cap on the base lending rate has eroded decision making instruments in the hands of the Central Bank of Kenya nearly paralysing the execution of monetary policy, Citibank economists have warned.
David Cowan, Citibank’s Africa economist, says in a newly-released note that the CBK’s decision to hold the rate flat amid high inflation and slow private sector credit growth is the clearest symptom of the paralysis that could in the long term have devastating consequences on the economy.
Mr Cowan’s position is in line with that of the International Monetary Fund (IMF), which has advised Kenya to remove the rate cap, citing its negative effect on access to credit and economic growth.
Mr Cowan says in his weekly economic note that it is “hard to know which way the CBK’s next move will be” on the base rate, because of uncertainty over the possible economic impact of moving the rate on which bank loans are now pegged.
“Despite the rise in inflation so far in this year, the CBK has not increased the CBR, for two reasons. First, the rise in headline inflation has been clearly driven by food prices, which the CBK has tried to look through, notably at a time when lending to the private sector has been slowing significantly,” Mr Cowan says in the note.
“Second, its policy response is still complicated by the passing of the Banking Amendment Act last year, which makes the economic impact of raising and lowering the CBR less clear-cut.”
Inflation fell to 9.2 per cent in June from 11.7 per cent in May, but is still above the preferred upper range of 7.5 per cent.
Citibank’s warning comes just days after the CBK published data showing that credit to the private sector expanded at a slower pace of 3.3 per cent in the year to March 2017, the slowest rate in more than a decade.
The CBK has held the base rate at 10 per cent since September 2016, in effect keeping the maximum rate at which banks can lend at 14 per cent.
The regulator has so far resisted moving the rate in spite of the fall in in the pace of credit growth.
The shilling has stayed relatively stable this year having depreciated by 1.2 per cent to the dollar since January.