CBK expected to hold its base lending rate


File Photo of the Central Bank of Kenya.
File Photo of the Central Bank of Kenya.

In Summary

  • The reserve bank trimmed its Central Bank Rate (CBR) from nine percent at the last Monetary Policy Committee (MPC) with the view to provide further stimulus to private sector credit recovery following the repeal of interest rate caps.
  • Cytonn Investments Chief Operations Officer Shiv Aurora believes the CBK will pass up on the opportunity to pull the strings on the CBR while awaiting a clearer picture of commercial lending in the post rate cap.
  • November’s MPC survey pegged economic growth prospects on the payment of pending bills, an anticipated recovery in credit to SMEs, predictable inflation and improved weather conditions, factors which continue to hold supporting a call for a retention of the CBR.

The Central Bank of Kenya (CBK) is expected by large to hold its base lending rate at 8.5 percent in observation of the translation of its last policy cut in November.

CBK trimmed its Central Bank Rate (CBR) from nine percent at the last Monetary Policy Committee (MPC) with the view to provide further stimulus to private sector credit recovery following the repeal of interest rate caps at the start of November.

Cytonn Investments Chief Operations Officer Shiv Aurora believes the CBK will pass up on the opportunity to pull the strings on the CBR while awaiting a clearer picture of commercial lending in the post rate cap.

“It would be early to tell the extent of private sector credit recovery. You would however not expect an immediate pick-up in terms of capital to businesses as one has to go through credit analysis and a number of other factors just to be able to get a loan,” he said.

Genghis Capital Equities Analyst Patrick Mumu argues commercial banks have likely taken the high road on new credit disbursement as they remain prudent to risks including asset quality deterioration even as they keep a keen eye on the recovery of the business environment.

“We are seeing a very conservative approach from banks following the repeal on caps. Bank lending is expected to be quite healthy but not a robust as expected,” he said.

Further, the financial markets remain sensitive to the fiscal consolidation policy translation ahead of the release of the final budget estimates for the 2020/21 fiscal year by the National Treasury next month.

From the wait and see approach, the tapping of the domestic credit market by the government to fill subsequent budget deficits remains a key watch with upward pressure expected on yields to issued Treasury bills and bonds towards the end of the current financial year in June.

“The CBK always holds an accommodative bias and it should have no interest to surprise the market if they really want to anchor expectations,” said Stanbic Regional Economist Jibran Qureishi.

According to Barclays Head of Treasury for East Africa Anthony Mulisa, the yield on a one year Treasury paper sets the prevailing market interest rates and not necessary the CBR.

“Our pay out to depositors is set on the one year Treasury bill. If liquidity is tied up by heavy domestic borrowing, the benefit tapped by banks from the lowering of the CBR is zero sum,” he said.

In spite of the stay of interest caps in 2019, private sector credit growth gained by 6.6 percent year on year in October as average commercial bank lending rates slipped further to 12.47 according to CBK records to September.

Nevertheless the yield on a one year Treasury bill (364 day) peaked at 9.8 percent last week from a 12-month low 8.8 percent in July last year.

Meanwhile, the interbank rate fell to 3.8 percent from a higher 6.9 percent average in October 2019 signalling a surge in overall liquidity.

November’s Monetary Policy Committee (MPC) survey pegged economic growth prospects on among others the payment of pending bills, an anticipated recovery in credit to small and medium enterprises (SMEs), predictable inflation and improved weather conditions, factors which continue to hold supporting a call for a retention of the CBR.

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Story By Kepha Muiruri
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