Interest cap complicates work of monetary team, says regulator

Central Bank Governor Patrick Njoroge. Even after adjusting the rates in favour of borrowers, he says the new law has complicated management of the country’s monetary policy. (PHOTO: FILE/ STANDARD)

Even after adjusting the rates in favour of borrowers, Central Bank Governor Patrick Njoroge says the new law has complicated management of the country’s monetary policy.

Njoroge reckons that it is now not possible to explicitly determine whether a reduction in rates will automatically result in increased lending as was the case in the old interest regime.

He alluded that the interest cap benefits may swing either way.

“Everything could be hunky dory, on the other hand, things may not be hunky dory,” Njoroge said in an interview yesterday. “It is important not to assume that everything will go in a particular way,” he was quoted by Bloomberg news.

Just when commercial banks were coming to terms with pricing their loans at a maximum of 14.5 per cent, the Central Bank of Kenya (CBK) further slashed the rate by 50 basis points on Wednesday, defying industry expectations.

Through its rate-setting organ, the Monetary Policy Committee (MPC), the CBK cut its benchmark-lending rate to 10 per cent, sending a fresh shock in the banking industry that was grudgingly implementing the new rates.

In explaining the thinking behind the decision, Njoroge said the committee was concerned about the persistent slowdown in private sector credit growth. Njoroge said that the CBK had expected the lending to be at between 12 to 15 per cent by June this year, however, the sector only received about seven per cent of the credit.

“The MPC noted the continued decline in growth of private sector credit which has persisted since the last meeting, posing a risk to economic growth,” the CBK said.

CBK also noted that the distribution of liquidity in the banking sector had improved. The average commercial bank’s liquidity ratio increased to 41.9 per cent in August from 41.6 per cent in June, while the capital adequacy ratio increased to 19.2 per cent from 18.9 per cent over the same period.

The MPC committee also looked at the cost of living in the country, with the headline inflation decreasing to 6.3 per cent, that it said was within the government’s target.

“The three month annualised inflation has remained stable since June, an indication that there were no significant demand pressures in the economy,” the CBK said. The latest cut has handed consumers a major victory against commercial banks, who had resisted all market driven interventions to lower rates.

Those with existing loans will be the first beneficiaries given that banks will be forced to revise their rates to 14 per cent immediately, just a week after they dropped them from a high of over 22 per cent to 14.5 per cent.

Njoroge said that banks are currently making a 30 per cent return on equity, one of the best returns around the world compared to South Africa and the United Kingdom.

“Banks have been making a 30 per cent return on equity. In the UK it is between 5 - 7 per cent, while in South Africa it is about 15 per cent. Where else can you get that kind of return? There is scope for lowering rates,” Njoroge said.

The regulator said the country has sufficient foreign exchange reserves to cushion it against any shocks in the market but said that it is still monitoring other risks in the global economy that may affect the economy.