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Relief for borrowers as Central Bank of Kenya retains benchmark rate at 11.5pc

NEWS
By Moses Michira | November 18th 2015
Bloomberg graph tracking performance of the shilling against US dollar.

Borrowers can look forward to cheaper loans following a decision taken by the Central Bank of Kenya (CBK) monetary committee to retain the benchmark rates at 11.50 per cent.

It was a widely anticipated outcome considering that the shilling had regained stability, allowing commercial banks lend more to individuals and businesses after cutting their lending rates.

CBK Governor Patrick Njoroge last evening said the Monetary Policy Committee, which he chairs, was comfortable with current levels in inflation and foreign exchange.

“The Committee concluded that the monetary policy measures in place are appropriate to maintain market stability and anchor inflation expectations,” Dr Njoroge said in a statement after chairing the MPC meeting yesterday.

The MPC had therefore decided to retain the CBR at 11.50 per cent, he added. For the common man, the decision to hold the benchmark rate would mean that interest rates should continue falling.

Already, commercial banks have signalled that they are setting aside earlier intentions of raising lending rates to up to 30 per cent – as a reaction to the market conditions.

Equity and Barclays have announced their effective lending rates as 17 per cent and 18.5 per cent respectively, setting the stage for market-wide decline in borrowing costs and relief for customers.

A raise on the benchmark interest rates could have translated to higher costs of borrowing, an unpopular outcome going by the borrowers’ sentiment over the last three months.

Njoroge said that a slowdown in government borrowing from the domestic markets had helped ease the cash crunch, whose result has been a fall in Treasury Bill rates that has since eased to a single digit level as at last week.

“The fiscal measures taken by the National Treasury, including the issuance of a syndicated loan in November, have eased pressures on Government domestic borrowing and interest rates,” read in part the MPC’s statement.

Earlier, National Treasury Cabinet Secretary Henry Rotich said the spike in interest rates – which CBK believes was caused by a perception that the State was broke and therefore desperate to borrow, was unsustainable.

“We will consider other sources of funds including borrowing externally from banks,” Rotich said in a statement three weeks ago, which precipitated the fall in the Government’s sponsored debt instruments.

By then, a Sh60 billion loan sought by the State from three commercial banks two weeks ago was about to be released, and has been directly tied to the lower borrowing appetite and subsequently the sharp decline of T-Bill rates. T-Bill rates indicate the level of interest that the government pays on debt instruments repayable in three or six months.

But since the government bears no risk of default, lending to the private sector comes at a premium, commensurate to the risk profile as assessed by the bank.

The CBK boss has explained that the past decision to raise the CBR rates from 8.5 per cent in June to the current 11.5 per cent was only a measure taken to reverse the sharp depreciation of the shilling, which was being rocked by appreciation of the US dollar.

A slump in dollar receipts from the country’s key foreign exchange earners of agricultural exports and tourism had also taken a hit on the economy, compounding the problems of the home currency.

But with the current exchange rate of Sh102 against the dollar viewed to be stable, the regulator hence not consider the need for any additional corrective measures to stabilise the local unit.

Dr Njoroge had earlier said that the CBK was not keen on starting a new cycle of removing excess cash from the market, citing that a sustained high interest rate environment would be destructive to the economy.

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