Banks should cut lending rates in tandem with Central Bank Rate

The economy is gradually waking up to good tidings. The overwhelming approval of the new constitution in a vote that was largely peaceful has left all sectors of the economy looking up.

Already, players in the tourism sector are buoyant the result should see more tourist arrivals. The business community, which had singularly pegged the economy’s complete turnaround to the approval of the new constitution, is agreed the investment environment is set for a revolution.

But even before the vote, there were indications the economy had finally bottomed out. The turnaround is partly attributed to Government efforts to stir consumption through the Economic Stimulus Package.

It is, however, the banks that have reaped a windfall as the Central Bank of Kenya (CBK) cuts its lending rate to persuade banks to lend more.

In a move that confounded the market, CBK Monetary Policy Committee cut the Central Bank Rate (CBR) by 75 basis points to six per cent – the seventh cut since the start of an easing cycle in December 2008.

CBK is sending a strong message to banks to lower their high lending rates, and soothe market fears yields across the curve were set to tick up after a largely domestic-driven bond market rally.

While there have been attempts by several banks to cut lending rates, there is still adequate room for further reductions, especially coming on the backdrop of several banks posting huge profit margins.