All eyes on CBK on review of Kenya economy base lending rate


All eyes on CBK on review of Kenya economy base lending rate
CBK Governor Patrick Njoroge adresses a news conference at the Central Bank's buildings on Tuesday, May 28, 2019 PHOTO | CITIZEN DIGITAL

In Summary

  • While the CBK has been relatively silent in the aftermath of the repeal on ceilings to lending with Governor Patrick Njoroge stopping short of indulging in the debate, the bank is now set to review the economy’s base lending rate- the Central Bank Rate (CBR) next week.
  • While previous expectations on past decisions by the monetary committee were largely of a hold to existing rates, investments analysts’ sentiments point to Monday’s conclusion being more of a split decision than a unanimous one.
  • Key macros including inflation and Forex exchange have held steady in the recent past to warrant a case for both cuts to the CBR and the maintenance of the status quo.

All eyes will be on the Central Bank of Kenya (CBK) as it offers guidance on the direction of interest rates in the market.

The CBK has been relatively silent in the aftermath of the repeal on ceilings to lending with Governor Patrick Njoroge stopping short of indulging in the debate.

However, the central bank is now set to review the economy’s base lending rate- the Central Bank Rate (CBR) next week.

Borrowers, banks, investment brokerages and investors will be paying keen attention to CBK’s pronouncement on the key lending rate from the Monetary Policy Committee (MPC) meeting on November 25.

The CBR, which is on the top line defined as the lowest rate of interest it charged on loans to banks, is usually crucial in the determination of both market interest rates and the amount of money in circulation within the economy.

CBK’s interest setting role has however been constrained in the last three years from the long stay of interest rate caps which choked monetary policy transmission in impacting economic growth.

According to a recent study by the bank, the effects of the MPC’s role which previously took between three and 12-months to hit home were stretched out to between 12 and 20 months to truncate CBK’s role.

Split decision

Previous expectations on past decisions by the monetary committee were largely of a hold to existing rates.

However, investments analysts’ sentiments point to Monday’s conclusion being more of a split decision than unanimous.

Head of Research at AIB Capital Sarah Wanga for instance anticipates a cut to the CBR rate as the CBK obliges to private sector credit growth stimulation to point to lower interest rates on bank loans.

“The CBR is likely to come down. This as an indicator to the market that interests rates may come down,” she said.

Researchers at Cytonn Investments back up the expectation for a rate cut on the continued stay of macro-economic stability.

This is to include a predictable inflation growth range and a solid Forex exchange rate to project a downward revision of the CBR by 50 basis points.

However, investment analysts at Sterling Capital are of a differing opinion in their anticipation for a hold in the lending rate at the current nine percent.

Having taken note of the growing sentiments for a downward revision, the analysts hold out for a continued stay on prevailing rates to mirror pragmatism on CBK’s part.

“It would be too soon to make abrupt monetary policy decisions and the policy makers might want to monitor development following the repeal of the interest rate capping law.

Key macros including inflation and Forex exchange have held steady in the recent past to warrant a case for both cuts to the CBR and the maintenance of the status quo.

Inflation has for instance held well within the prescribed band of 2.5 to 7.5 percent with October’s inflation coming at the midpoint five percent.

Meanwhile, economic output, measured by GDP is set to recover in the second half of the year from the perils of the past two quarters to grow by between 5.7 to six percent as per various economic outlook reports.

Moreover the shilling has regained the majority of its losses in the year to date against the US dollar to stand at Ksh.101.30 at market close on Thursday from a contrasting high of Ksh.104.60 earlier in the year.

The current account deficit has meanwhile improved to Ksh.107.6 billion from Ksh.122 billion supported largely by a reduced import expense and increased remittances.

Nevertheless, private sector credit growth has kept below the past five-year average even as liquidity holds up with the average inter-bank rate sitting at 3.5 percent.

Further to the risk to monetary policy easing, the National Treasury has invoked a widened deficit by increasing government spending by 2.8 percent through proposals contained in the first supplementary budget to sanction increased borrowing.

Cognizant of the mix up in monetary policy impact, the CBK has been hesitant to instill much changes to the CBR to instead actively keep the macro-metrics on its radar.

Since the entry of the rate cap in September of 2016, the CBK has only instilled two CBR cuts in March and July last year resulting in net adjustment of the base lending rate by one percent over the three years.

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Story By Kepha Muiruri
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