Central Bank may hold rates as interest cap law complicates policy

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Kenya’s Central Bank will probably leave its key rate unchanged as policy makers monitor accelerating inflation and whether previous cuts are reviving lending to consumers and businesses.

The CBK's rate-setting committee led by Governor Patrick Njoroge will retain the benchmark rate at 10 per cent for a third consecutive meeting, according to all eight economists in a Bloomberg survey. This even as inflation accelerated to the highest rate in more than four years in February, driven by a jump in food prices.

The committee shaved a total of 150 basis points off its key policy rate in 2016 in a bid to rejuvenate growth in lending to the private sector, which slowed to the lowest level in 13 years in December.

A law capping lending rates to 400 basis points above the central bank rate has added to banks’ reluctance to extend credit. This is complicating monetary policy and means the central bank is caught in an unenviable position, according to Jacques Nel, economist at Paarl, South African-based NKC African Economics.

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“Given the uncertainties involved in navigating monetary policy in such unorthodox circumstances, they will hold off any policy rate adjustments until there is more clarity on the state of credit growth and the extent to which elevated food price inflation endures,” Nel said in emailed responses to questions.

While Kenya’s economy probably expanded 6 per cent last year, according to International Monetary Fund estimates, the interest-rate cap could trim two percentage points off economic growth this year and in 2018, the lender said in February.

Treasury forecasts national output will expand by between 5.8 per cent and 6 per cent in 2017. That is despite a ballot scheduled for August. Growth usually tapers off during election years in the $69.2 billion economy.

“The law was created to make credit more accessible for the people, but banks now have no incentive to lend to people because they can get more attractive yields from government securities,” World Bank senior economist Allen Dennis said at a briefing Friday in Nairobi.

The law has contributed to private-sector credit growth slowing to 4.9 per cent in December from 18.1 per cent a year earlier.

However, increasing rates may not deliver the desired boost to private-sector credit growth immediately, said Faith Atiti, a senior economist at Nairobi-based Commercial Bank of Africa.

Lenders have been reluctant to extend credit due to sluggish economic growth and rising non-performing loans, she said. "Raising rates doesn't guarantee banks will start lending." —Bloomberg