Analysts say high interest rates not falling anytime soon

By Morris Aron

The current regime of high interest rates, which some economists say is not sustainable, will only drop if inflation eases off and the Central Bank of Kenya (CBK) absorbs the cue to signal banks to lower their lending rates.

According to analysts and bankers who are keenly monitoring interest rate trends, the earliest customers can expect any form of reprieve from their banks when taking a loan is at least two months away.

"Our forecasts indicate that interest rates will only start easing from the end of the first quarter, pegged on a drop in the overall cost of living, the decision of the monetary policy committee, and a number of other external factors," said Edward Etemesi, the chief executive of Standard Chartered Bank.

While many economists had expected a drastic fall in the level of inflation after the shilling stabilised and short rains came – heralding a drop in the cost of most basic commodities – the drop registered last month now appears insignificant from a policy perspective.

External tariffs

Inflation dropped to 18.31 per cent from 18.93 per cent recorded in December after hitting a high of 19.72 per cent in November, a drop mainly attributed to transport and communication sectors, with food yet to make any significant dent on the key economic indicator.

"I think that interest rates will not normalise until the middle of the year, and that is pegged on inflation easing off and a number of factors," said XN Iraki, an economist at the University of Nairobi at a recent interview.

"Being an election year, it is bound to be a tricky balancing act."

The forecasts of interest rates not dropping in the near future has rekindled a debate over whether banks have taken advantage of the situation to make extra-ordinary profits, and will be a matter of heated debate in Parliament when it reconvenes on Tuesday. Contained in the Financial Bill 2011 are proposals that seek to cap banks’ lending rates to four percentage points above the central bank rate (CBR), while setting the minimum interest rate on deposits at 70 per cent of the CBR.

Minimum return

According to the legislators behind the proposed law, banks’ lending rate should be capped at 22 per cent, while the minimum return to customers’ deposits should be 12.6 per cent – to rein-in on the huge interest rate spread that banks are said to exploit.