CBK says rate cap undermines independence

Central Bank of Kenya deputy governor Sheila M’Mbijjewe (centre) and Monetary Policy Committee (MPC) member Terry Ryan during a media briefing on March 20, 2018. PHOTO | DIANA NGILA | NMG 

By BRIAN NGUGI

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Summary

• A report by the Central Bank of Kenya, on whose basis the CBK is seeking public comments on the legal caps ahead of the planned review of the rate capping law, paints an adverse picture of the impact of the rates.
• The law was implemented following concerns raised by consumers regarding the high cost of credit.
• Banks have blamed the legal caps on the slow rate at which credit it growing.

A new report by the Central Bank of Kenya (CBK) says interest rate caps have undermined the conduct of monetary policy, but the law could be repealed by June this year.

The CBK report, on whose basis the CBK is seeking public comments on the legal caps ahead of the planned review of the rate capping law, paints an adverse picture of the impact of the rates.

It also says the legal caps on borrowing have undermined the independence of the CBK.

“Following the MPC (Monetary Policy Committee) meeting in January 2018, it was noted that there was scope for accommodative monetary policy, however, interest rate caps had created an environment of possible perverse outcomes, thus constraining the MPC from using the CBR (Central Bank Rate) to signal its policy stance,” it notes.

“Going forward, under the interest rate capping regime, there is no guarantee the central bank will be able to achieve its intended objectives. In the interest rate capping environment, use of (the) CBR will result in perverse outcomes.”

READ: Costly loans beckon as Rotich commits to rate cap law repeal

Kenya introduced interest rate control in September 2016 through an Act of Parliament that limits lending rates to not more than four percentage points above the CBR and also required lenders to pay interest at the rate of 70 per cent of the CBR on term deposits.

The law was implemented following concerns raised by consumers regarding the high cost of credit.

Banks have blamed the legal caps on the slow rate at which credit it growing.

“We will be talking to all the stakeholders including Parliament and the bankers. The pointers to how this law will be amended or repealed I don’t think it is a foregone conclusion. There are many ways of removing it without necessarily going forward with a law that repeals it,” said Dr Njoroge.