CBK policy team meets as interest rate doubts persist
The Central Bank of Kenya (CBK) policymaking team is set to meet on July 30 with proposed changes to the rate cap law hanging over its head.
The Monetary Policy Committee (MPC) is widely tipped to leave its policy rate unchanged — partly thanks to relatively low inflation– as banks ration credit to small firms.
The Treasury is pushing for the scrapping of the controls even as MPs vowed they would scuttle the bid, meaning the CBK would be walking a tightrope in making a decision.
At its last bi-monthly meeting on May 28, the MPC retained the benchmark lending rate at 9.5 per cent. The maximum cost of loans remained unchanged as a result.
“Given signs of an economic recovery and muted inflation, we anticipate a ‘hold’ decision and expect the committee will continue to strike a more accommodative tone,” said Stephanie Kimani, a research economist at the Commercial Bank of Africa (CBA) in a pre-MPC note.
“Further underpinning the unchanged policy rate is the reality of tighter monetary policy in the US, growing threats of capital reversals and persistent doubts over the benefit of the interest rate capping law,” she added.
Independent analyst Aly Khan Satchu expects no change in the policy stance due to the little impact of the rate capping on the market.
“I expect rates to be held in check. The rate cap has interfered with monetary policy transmission and its repeal or substantive modification is, I believe, required as a sine qua non for normalised monetary policy operations,” he said.
The capping has been blamed for lower loans growth especially for small firms as banks opt for government paper.
Private sector credit grew just 2.8 per cent in the year to April, up from 2.1 per cent in the 12 months to February.
Kenya capped commercial lending rates in September 2016 at four percentage points above the central bank’s benchmark rate, in an attempt to limit the cost of borrowing for businesses and individuals.
The MPC had cut the rate by 50 basis points at the last sitting in March—saying the economy needed a boost—pricing maximum loans at 13.5 per cent.
“The committee assessed that the policy action at its March meeting was yet to be fully transmitted to the economy, including a determination of any perverse outcomes,” central bank said in a statement in May.
Kenya’s year-on-year inflation rose to 4.28 percent in June from 3.95 percent the previous month, remaining within the government’s preferred band of 2.5-7.5 per cent.
CBK noted in its last meeting that lending to the manufacturing, building and construction, finance and insurance and trade sectors grew by 10.1 per cent, 14.1 per cent, 10.1 per cent, and 5.0 per cent, respectively.