Relief for borrowers as MPC cuts the cost of loans

Central Bank of Kenya (CBK) governor Patrick Njoroge. FILE PHOTO | NMG 

By BRIAN NGUGI

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Summary

• The Monetary Policy Committee (MPC) fixed the benchmark rate at 9.5 per cent from 10 per cent, meaning banks are now required to charge borrowers a maximum of 13.5 per cent interest on loans.
• It is the first time that the CBK has cut the signal rate since legal caps were introduced on the cost of credit one and a half years ago.
• The MPC said its decision was informed by the need to support economic activity in the changing business environment.

The Central Bank of Kenya (CBK) Monday cut the benchmark lending rate by 0.5 percentage point, signalling a looming drop in the cost of loans by a similar margin and offering relief to millions of borrowers.

It is the first time that the CBK has cut the signal rate since legal caps were introduced on the cost of credit one and a half years ago.

The Monetary Policy Committee (MPC) fixed the benchmark rate at 9.5 per cent from 10 per cent, meaning banks are now required to charge borrowers a maximum of 13.5 per cent interest on loans.

The MPC said its decision was informed by the need to support economic activity in the changing business environment.

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 Central Bank Rate.

The Banking (Amendment) Act, 2016, also required lenders to pay interest at the rate of 70 per cent of the CBR on term deposits.

Banks have, however, shied away from lending to individuals and blamed the legal caps on the slow rate at which credit it growing.

CBK governor Patrick Njoroge, who chairs the MPC, said a relatively stable forex market, a narrower current account deficit and a build-up of forex reserves that continue to cushion the economy from unforeseen shocks informed the decision to cut the base rate.

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Dr Njoroge said there is increased optimism for renewed growth, but added that the economic output was “below its potential level.”

“The (MPC) concluded that there was scope for easing its monetary policy stance in order to support economic activity. Consequently, while noting the risk of perverse outcomes, the committee decided to reduce the Central Bank Rate (CBR) to 9.50 per cent from 10 per cent,” said Dr Njoroge.

The reduction in the benchmark rate came following release of fresh data showing private sector credit grew 2.1 per cent in the 12 months to February this year, slightly lower than the 2.4 per cent in December last year.

“The slowdown in credit growth was largely due to substantial loan repayments in the transport and communication sector,” said Dr Njoroge.

He, however, noted that lending to the manufacturing, real estate, and trade sectors remained relatively strong, growing by 13.1 per cent, 8.3 per cent, and 5.9 per cent, respectively.

READ: Deal with IMF set to raise cost of loans

The MPC decision came against the backdrop of sustained sentiment by analysts that Kenya’s decision to peg interest rate cap on its base lending rate had eroded the CBK’s decision-making capacity.

The government has promised the International Monetary Fund (IMF) a repeal of the interest rate capping law, leaving consumers under a cloud of uncertainty over the future cost of loans.

Treasury secretary Henry Rotich last week said the government will review the caps in the wake of a sharp decline in credit growth.