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Central Bank piles pressure on banks to chop lending rates

By - | January 11th 2013

By Jackson Okoth

NAIROBI; KENYA: The Central Bank of Kenya (CBK) has once again lowered its benchmark-lending rate, a signal for commercial banks to cut the price of loans offered to customers.

In its first meeting this year, the Monetary Policy Committee (MPC), the organ charged with setting up the monetary policy agenda, cut the Central Bank Rate (CBR) from 11 per cent to 9.5 per cent.

“The CBR has moved into single digits, a powerful signal to commercial banks to also cut their base lending rates,” said Aly Khan Satchu, an independent analyst.

Positive outlook

“The CBK is sending a message that it is now concerned with growth numbers after bringing inflation and the exchange rate under control.” A decision to ease cost of credit to commercial banks is informed by low inflation, improved weather conditions and continued fall in the international crude oil prices.

“There is a positive outlook on the economy including stability in both product and foreign exchange markets reflected in stable inflation and the exchange rate,” said Prof Njuguna Ndung’u, CBK governor in a press statement. “The Central Bank of Kenya has done a bit more than the 100 basis points we had expected at the January meeting. 

We had thought that recent Shilling weakness might make the CBK somewhat more cautious about the pace of easing, despite the vast difference that has opened up between the CBR and CPI,” said Razia Khan Regional Head of Research, Africa-Standard Chartered Bank.

He added that it remains to be seen whether the authorities have much appetite for an aggressive rate move in March, given the elections – and perhaps some of the easing that would have taken place then is being brought forward.

Figures indicate that inflation declined from 3.25 per cent in November 2012 to 3.20 per cent in December, last year, reflecting a decline in food prices and easing demand pressure in the economy. The exchange rate has remained stable since the last MPC meeting, fluctuating within the narrow range of Sh85.38 to Sh86.61 against the US dollar. The level of usable foreign exchange reserves held by the CBK increased from $ 5.3 billion (Sh4.57tr) to $ 5.5 billion (Sh4.75tr)—equivalent to 4.15 months of import cover at the beginning of January this year..

Reluctant banks

Although the CBR rate has been on a fall from 18 per cent in December, 2011, commercial banks have been slow in lowering their base lending rates in tandem. A spot check reveals that corporate lenders still maintain rates of between 18 .0 and 21.5 per cent. Latest data from Kenya National Bureau of Statistics shows that the economy registered a notable recovery in the third quarter of 2012 following improved macroeconomic stability and robust agricultural sector performance.

Economic growth in the third quarter was 4.7 per cent up from 3.4 per cent. This is also the quarter that inflation declined rapidly. “The main risks to macroeconomic stability were the uncertainty over the full resolution of the Eurozone problems and balance of payments pressures attributed to the high current account deficit,” said Prof Ndung’u.

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