CBK says private sector borrowing to slow down in the coming months

Money Markets

Central Bank governor Njuguna Ndung’u during the launch of the Kenya Financial Diaries at the Hilton Hotelin Nairobi on August 12. PHOTO | DIANA NGILA 

By GEOFFREY IRUNGU

In Summary

• Private sector credit will grow by 23.6 per cent this month, but this should fall gradually to 21.7 per cent in December before declining further to 16.1 per cent.
• Central Bank bets on fall to help arrest inflationary pressures that may arise in the economy.

Central Bank of Kenya (CBK) expects the pace of credit growth to the private sector to decelerate as it targets to reduce inflationary pressure.

Private sector credit will grow by 23.6 per cent this month, but this should fall gradually to 21.7 per cent in December before declining further to 16.1 per cent. The latter will represent a decline of 5.6 percentage points.

Though in percentage terms the borrowing by private sector will fall, it will increase in absolute amount to Sh1.993 trillion by June next year from Sh1.825 trillion this month according to the latest Monetary Policy Statement covering the period to June next year.

“IMF staff recommends that the CBK stands ready to tighten monetary policy,” says an IMF report.

The regulator itself, however, puts a caveat that fighting inflation will also depend on how the Treasury manages the fiscal side of things, meaning how it spends cash at its disposal.

“The success of CBK’s monetary policy measures to fight inflation will also depend on the effectiveness of the institutions charged with the responsibility of managing the supply side of economy that would have a direct impact on food and fuel prices,” said the CBK in the statement.

Analysts said the need to reduce the growth rate of credit has everything to do with arresting any inflationary pressures that may arise in the economy.

But with the actual amount rising by Sh168 billion in the period to June next year, it means the CBK is also trying to ensure liquidity is not too tight to constrain economic growth.

READ: Private sector’s borrowing grows faster than State’s

Analysts agreed that the CBK is performing its role well by targeting the liquidity in the financial markets which it can control.

“I think the CBK is looking at the possible inflationary pressures that could be unleashed by allowing credit to the private sector to grow too quickly,” said Alex Muiruri, head of fixed-income sales at Kestrel Capital, a brokerage house in Nairobi.

Mr Muiruri said the government would want core inflation — that tracks the growth in money supply — to remain within the single digit level if it is to be seen as controlling the cost of living.

“Core inflation has been subdued at below five per cent. Credit has been growing by over 20 per cent for a while and so the CBK does not want to add fuel to the fire in allowing faster growth in credit to the private sector,” said Mr Muiruri.

Maureen Kirigua, research analyst at Sterling Securities, said the Central Bank was looking at a tough balancing act between growing the economy and ensuring the price level does not escalate any further.

“By reducing the pace of credit growth to the private sector, the CBK is trying to avert demand-driven inflation,” said Ms Kirigua.