CBK sends mixed signal with cut on banks lending rate

What you need to know:

  • Prices of goods and services are expected to rise faster in coming months as the Sh9 per litre increase in diesel prices flows in the economy.

  • Banks are required to use the KBRR as the base lending rate with a free hand to load on a premium to cater for operating costs.

  • Borrowing has been slowing down due to high interest rates guiding MPC’s decision to cut the base lending rate.

The Central Bank of Kenya’s (CBK) Monetary Policy Committee today sent mixed signals to the market by cutting the minimum lending rate for banks, commonly referred to as KBRR, which it has previously cited as inefficient.

The MPC slashed one percentage point from the Kenya Banks Reference Rate (KBRR) in a bid to put pressure on commercial banks to lower lending rates and avert an economic slowdown.

The cut, though a reprieve to borrowers, comes months after CBK governor Patrick Njoroge dismissed KBRR’s relevance casting doubt on whether banks will follow the signal.

“In line with the framework, the CBK has revised the KBRR to 8.90 per cent from 9.87 per cent, effective from July 25, 2016,” said Mr Njoroge in a statement.

The MPC retained the indicative Central Bank rate (CBR) at 10.5 per cent in a bid to check inflation expectations and maintain currency stability.

The inflation rate has been largely within the CBK’s target, inching up marginally to 5.8 per cent last month from 5 per cent.

Prices expected to rise faster

Prices of goods and services are expected to rise faster in coming months as the Sh9 per litre increase in diesel prices flows in the economy.

The shilling has been stable in the face of global turbulence caused by Britain’s decision to exit the European Union.

Foreign currency reserves are at record highs of Sh779 billion ($7.79 million), which is equivalent to 5.15 times the country’s monthly import bill, giving the CBK enough ammunition to defend the local currency.

Borrowing has been slowing down due to high interest rates guiding MPC’s decision to cut the base lending rate.

The rate of growth in lending to the private sector has been slowing down to 14.3 per cent in April compared to 19.8 per cent last October, shows data from the Central Bank, underlining the adverse effects of a tight monetary policy.

Banks are required to use the KBRR as the base lending rate with a free hand to load on a premium to cater for operating costs.

KBRR was a negotiated between the regulator, bankers and politicians to bring transparency in credit pricing without regulating interest rates.

KBRR, which is calculated as an average of the CBR and the 91 day Treasury bill rate was expected to fall in line with drop in the two parameters since January.

The rate is scheduled to be reviewed twice a year - in January and July.

In January the MPC disregarded the policy formula leaving the rate unchanged, arguing that it was not corresponding with the desired economic direction.

The Treasury Bill rate, which is a component of the KBRR, has dropped by four percentage points since the beginning of the year while the CBK has lowered CBR by one percentage point over the same period.

This indicates the KBRR was expected to fall by at least two percentage point from the current 9.87 per cent.

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