Central Bank retains CBR at 10pc with eyes on interest cap effects

The Central Bank of Kenya (CBK) has retained the benchmark lending rate at 10 percent following its bi monthly rate setting meeting.

The decision to hold interest rates comes even as February inflation shot up to 9.04 percent and continued slowdown in private sector credit.

But in making its decision, the central bank’s monetary policy committee (MPC) said further evaluation of the interest capping law was required.

According to the central bank private sector credit had stabilized at four percent even as banks moved away from issuing personal loans.

“While the growth of private sector credit has stabilized at 4.0 percent, the share of loans to corporates has increased relative to business and personal loans,” CBK governor Dr Patrick Njoroge said.

Dr Njoroge said loan approvals declined by six percent between December and February 2017 with banks largely introducing stricter loan terms especially for micro, small and medium sized enterprises (MSMEs).

The interest cap law came into effect in September last year with banks bracing for slimmer returns as already witnessed from results released.

Both the central bank and Treasury have hinted that the law could be subject to amendments in a bid to spur economic growth.

Dr Njoroge said developments in the trade, manufacturing, real estate, and private households, which account for 60 percent of total credit to the private sector declined.

“This was partly due to a slowdown in exports by the manufacturing sector, delays in registration of land titles and building approvals, and, availability of alternative external financing for key private sector projects,” he said.

On the inflation front, the banking regulator maintained that the steep rise in food prices would persist until the onset of the short rains but was confident all other categories used to calculate inflation would remain stable.

“The committee concluded that overall inflation is expected to remain outside the government target range in the near term due to the elevated food prices, even as demand pressures remain subdued,” he said.

The government has an inflation target of between 2.5 and 7.5 percent.