CBR lowered to 10pc as banks feel interest squeeze

Even before banks could adjust for the new interest capping era, the Central Bank of Kenya (CBK) has thrown a new twist lowering the central bank rate (CBR) to 10 percent from the previous 10.5 percent.

The move will be good news for borrowers who will now take out loans at a maximum of 14 percent.

The Banking Amendment Act caps interest rates at four percent of the CBR.

The move by the rate setting committee comes even as the banking regulator fails to give clarity to the market on the implementation of the new law.

In lowering the CBR, CBK governor Dr Patrick Njoroge noted that private sector credit supply had declined.

“The committee remains concerned about the persistent slowdown in private sector credit growth. The MPC therefore decided to lower the CBR by 50 basis points to 10 percent,” Dr Njoroge, who is also the chairman of the MPC, said in a statement.

A forecast conducted by Reuters on 12 economists and analysts expected the MPC to hold the rate as it monitored the full impact of the law change.

At one point commercial banks had expected interest rates to be pegged on the Kenya Banks’ Reference Rate (KBRR) as the CBR was subject to external factors such as inflation and currency volatility.

“It puts the cats ahead of the pigeons. I would have expected the MPC to hold to see how the act played out before making monetary policy changes,” ABC Capital Corporate Finance and Advisory Manager Johnson Nderi said.

CBK data shows that at the end of July private sector credit stood at Sh2 trillion growing at an average of seven percent year on year.

Ecobank Head of Research George Bodo said in making its decision, the MPC did not foresee major shocks given inflation and foreign exchange were within

“They did not see any threat to consumer prices, hence the need to be bullish on the economy,” Mr Bodo said.

Bank executives will now be rushing to re price rates just six days after the new law came into place.

Through the Kenya Bankers Association, lenders also committed to transfer the benefits of interest caps to borrowers who had existing loans.

With the central bank remaining mum, banks have been interpreting the new law in a manner that would give them an edge in the market.

This played out last week when Equity Bank moved to price mobile loans and credit cards on the new law, a position not shared by its peers.

This saw the KCB Group also cap interest on KCB M-Pesa loans as confusion reigns on whether the law also captures micro loans.

Central Bank Governor Dr Njoroge will on Wednesday hold a briefing to shed light on the MPC decision and perhaps give clarity over implementation.