CBK governor and Monetary Policy Committee chairman Patrick Njoroge. photo | salaton njau
Kenya’s inflation hit a five-year high of 11.7 per cent May,
which would ordinarily be a signal for strong action by the Central Bank
of Kenya (CBK) whose mandate is to maintain price stability.
Although
the rise in the cost of living was largely driven by food prices, the
regulator’s decision to hold the base lending rate steady at 10 per cent
was seen by some as indicative of the corner the CBK had been boxed
into by the rate cap law that pegs the cost of loans to the benchmark
central bank rate (CBR) rate.
At the height of the
inflation spike, Citi Africa economist David Cowan warned that policy
response to the high inflation and falling growth of private sector
credit was complicated by the rate cap law, which made it difficult to
gauge the economic impact of raising and lowering the CBR.
Exotix
Partners chief economist Start Culverhouse said after the last monetary
policy committee meeting in November that the CBK finds itself between a
policy rock and a hard place, where the CBR is effectively untethered
from macro fundamentals.
“They are effectively
squeezed between two different policy worlds: setting the CBR to spur
growth and control inflation on one hand, while trying to avoid
crippling private sector credit on the other,” he said.
“We
feel that recent changes in macroeconomic conditions have led to a
further divergence from what we consider to be an appropriate rate in
the seven to nine per cent range,” he added, noting that inflation has
since come down to the preferred range of five per cent plus or minus
2.5 percentage points.
The
last few months have also seen a concerted push-back by banks against
the rate cap on customer loans, latching onto the low private sector
credit growth even as official data shows the decline set in before the
law was enacted.
The law has resulted in lower interest
income for banks—their biggest source of revenue— with the industry
responding by cutting jobs and other costs.
The Kenya
Bankers Association (KBA) said in a survey released in October that the
lenders had laid off 1,933 employees between August 2016 and June 2017.
Banks are therefore expected to lobby hard to have the law revised once the House gets down to business in the New Year.
However,
in spite of support from the monetary regulator and the Treasury, the
lenders are unlikely to see a quick resolution in having the popular law
reversed by Parliament, which pushed it through last year in spite of
opposition from the monetary regulator.
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