The Central Bank of Kenya (CBK) Monday signalled commercial banks to cut the cost of loans after it lowered its benchmark lending rate for the first time since May 2018 and weeks after the removal of the legal caps on borrowing charges.

CBK’s Monetary Policy Committee (MPC), sitting for the first time since Kenya lifted the cap on commercial interest rates on November 7, reduced the CBR rate to 8.50 percent from 9.0 percent, saying the economy was operating below its potential.

The lowering of the rate is expected to signal banks to cut lending rates to boost supply of credit and put money in the hands of consumers, which will in turn boost demand for goods and services.

CBK says credit to the private sector grew by 6.6 percent in the year to October, compared to seven percent in the 12 months to September — which are both below the ideal growth level of between 12 and 15 percent.

“The committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” said Patrick Njoroge, the CBK Governor and chair of the MPC.

Banks, which are yet to review the lending rates after the removal of the caps, can ignore the CBK signal to lower loan charges in an environment where the government is not controlling borrowing costs.

Habil Olaka, CEO of Kenya Bankers Association — the bankers’ lobby group — reckons that lenders will consider other tools beyond the benchmark rate when pricing their loans, including government borrowing — which influences the cost of long-term deposits, which have an affect on borrowing rates.

“There are a number of benchmarks, the CBR being one of them; banks can use the T-Bill rates, or internal benchmarks as a base on which to price their loans,” Mr Olaka said.

Given his sentiments, T-Bill rates, which are influenced by the levels of government borrowing, look set to be the biggest determinant of loan rates.

Dr Njoroge remained optimistic that the Treasury would reduce borrowing, allowing money to flow to the private sector at lower rates to stimulate the economy.

CBK said scrapping of the interest rate cap had removed one of the concerns the banking regulator had about cutting the benchmark.

“This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy,” the bank said yesterday.

High-risk borrowers like individuals and small businesses face an increase in loan rates of up to three percentage points following the removal of the legal cap on commercial lending charges, KCB chief executive Joshua Oigara had said earlier. He said removal of the cap would ease lending to small businesses but forecast that their interest rate will increase to between 15 percent and 16 percent, up from the current 13 percent.

In the absence of regulation, interest rates are unlikely to breach the 20 percent level which prevailed before the introduction of rate caps in September 2016.

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