Central Bank hints at easing tight credit environment

Central Bank of Kenya (CBK) has hinted that it will ease prevailing tight credit policies to give room to businesses and economy to grow.

Patrick Njoroge, the CBK Governor reckoned that the Government fiscal position has improved since the interest rate crisis and there was no reason for CBK to maintain its tight credit policy. He, however, noted that CBK will be closely monitoring the situation and adjust accordingly. Addressing editors at a news conference, Njorogo said the expected shift that comes as a major relief to hard hit borrowers will be supported by Treasury’s plan to cut State’s budgetary expenditures.

He said Treasury will be submitting a supplementary budget to parliament next month to cut down on expenditure programmes and help reduce Government appetite for cash that had encouraged recent sharp rise in interest charges. This, he said, would further reduce interest rate prevailing in the market.

“It will help us to have a less tighter monetary stance,” Njoroge said adding that the proposed cuts would help ease on the current monetary policy. The CBK had raised rates by 300 basis points at two Monetary Policy Committee meetings in June and July to support the shilling, which has weakened by 13 per cent.

The expected shift in policy is expected to help lower interest charged by commercial banks. CBK aggressive tightening has helped stabilise the shilling and controlled inflationary expectations that posed a major risk to financial stability. “We have policy buffers. We have room to move and not in a corner as was the case then,” he explained in apparent reference to the recent sharp interest rate surge that rocked market confidence and left CBK with limited room for policy maneuvers.

Treasury bill stood at 9.218 per cent in auction last week from 9.210 per cent the previous week, and rates on government securities have been coming down in recent weeks after peaking at above 22 per cent in October.

Foreign currency reserves has since risen to Sh6.7 billion, or 4.3 months’ worth of import cover. “We are stronger than we were ... We can reduce volatility by just selling (dollars),” Njoroge said.

The governor is also optimistic of a better economic outlook as the country ushers in the New Year. “I can bet on the medium-term... the economic environment is on the path of recovery.”

He said only two per cent of investment in Kenyan government securities is held by foreigners and just a quarter of stock market investments were made up of foreign funds, an investment mix that is favourable and has limited bearing on the economy in case of capital flight by foreign stock holders.

Njoroge also said most of foreign funds invested in the local stock market had are long-term investors who normally hold on to their positions for several years. “This is not hot money that will go quickly,” he explained.